Why You Need to Separate Business and Personal Expenses

Do you use your business accounts for personal expenses? Separating expenses keeps:

  • Corporate funds corporate
  • Personal funds personal

Deciding to use your corporate credit card for a personal expense or dipping into your bank account with the intention of repaying it in the future is a big no-no.

Why?  

Commingling your personal and business expenses can cost you time and money. It’s also a red flag for audits. In today’s article, we’ll dive into a few of the many reasons why commingling funds is a big deal:

Your Records May Be Inaccurate

Record inaccuracies may not seem like a big deal, but a single mistake can be a very costly problem. Human error already accounts for 41% of inaccurate reporting in accounting. But if you commingle your accounts:

  • How can you plan for the future of your business? How do you calculate your true expenses or know what your cash flow may be next month when you’re dipping into your accounts?
  • How do you know how much you’ll owe in taxes? Since you’re mingling these expenses, it will become very challenging for your accountant to know if an expense is deductible or not.

If you don’t tell your bookkeeper or accountant that you used the company credit card to buy your significant other a gift, it can lead to some serious consequences. You don’t simply write off these expenses because not only is it simply not a business expense, but if you’re audited, they’ll find that you deducted non-business expenses.

Do you use professional bookkeeping services? You’ll also be making the lives of these professionals much harder because you’re not separating expenses.

Bookkeeping Will Be More Difficult 

Addressing commingled accounts is:

  • Difficult
  • Expensive
  • Timely

Bookkeepers have to sift through your books to determine every credit and debit you’ve made. If they can’t find receipts for purchases, they’ll try to track down the expense and even ask you about it.

Sorting through business and personal expenses is timely and expensive.

And then, you have to think about your cash flow management. What if the money that you used in the business was earmarked for something else?

If you run a business where you have a fiduciary responsibility to your clients (i.e. a certified financial planner or similar), your actions may be seen as a breach of this duty. You can also be accused of theft because the money is not your own.

Multi-member LLCs, partnerships, or corporations will also not look kindly on this practice. Chances are good that the owners will view your actions as theft.

It’s always best to do the right thing and keep your personal and business expenses separate. You’ll have a better understanding of your company’s financial health and will be better able to manage your own budget.

And if you’re audited, you’ll be sorry that you didn’t keep expenses separate from the start.

It Will Be a Red Flag If You’re Audited

Commingling personal and business expenses will be seen as a major red flag if you’re audited. Without separate accounts, it becomes increasingly challenging to decipher whether your money was spent on business or personal expenses. 

Audits are stressful enough. Commingling your funds will only make it even more stressful.

It Pierces the Corporate Veil

If you’re commingling funds, I encourage you to talk with a lawyer. They’ll tell you about piercing the corporate veil.

Note: I am not a lawyer and this is not legal advice 

What exactly does it mean to “pierce the corporate veil?” According to the Legal Information Institute (LII), “piercing the corporate veil” refers to a situation in which a company’s limited liability is put aside and a company’s directors or shareholders are held personally liable for actions or debts. Keeping your personal and business expenses separate will help eliminate this risk and allow you to preserve the benefits of limited liability.

Don’t know where to begin separating your expenses? Let’s find out where to start.

How to Separate Your Business and Personal Expenses

You know the risks of commingling funds, but how do you keep them separate? There are several things you can do to make a clear distinction between your business and personal expenses.

Open a Business Bank Account

The first and most important step is to open a business bank account. Keep all of your business funds in your business bank account and your personal funds in your personal bank account.

Simple enough, right? 

It becomes much easier to track and record your expenses accurately when all of your business spending comes from one, dedicated account.

Open a Company Credit Card

For most businesses, a company credit card is a tool they use for separating business and personal expenses. 

A business credit card will make it easy to track and control your spending while also building credit for your business.

As a bonus, improving your business’s credit will increase your chances of being approved for a loan in the future.

You can also apply for credit with a vendor or supplier under your company’s name to further separate your expenses and allow you to establish a credit history for your business. Trade credit will typically have financing terms of net 10 to net 60 days. 

Set Up Utility Accounts in the Business Name

If your business has a physical location, make sure that you set up your utilities accounts in your business’s name, including:

  • Internet service
  • Business mobile service
  • Leases

Utilities are bills that your business pays on a monthly basis, so it’s important to ensure they’re completely separate from your personal account.

Final Thoughts

If you run a business, it is crucial to keep your personal expenses separate. Commingling funds will only cause you headaches in the long run and could spell trouble if you’re audited.

The simplest solution is to get a corporate credit card and bank account. Use these accounts solely for business purposes, and keep the rest separate. 

To learn more about bookkeeping or to schedule an appointment, click here

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