When is it okay to combine your personal and business expenses? Most of the business owners I work with know that it is important to keep your business assets separate from your personal assets. I know many business owners who do not practice this and it is a bad idea to develop this pattern of behavior from both a legal and logistical point of view. If you are forming an LLC or a corporation, you must establish separate bank accounts and assets.
When forming a company or entity separate from yourself, keep in mind that you are putting up a corporate veil or shield. If you are legally mixing your business and personal funds, creditors can “pierce” this corporate shield and attack your personal assets. This would be the main reason for not mixing your funds and tax reasons. Let’s talk about what mixing is and how you can understand when you are and when you are not:
1) When you are mixing funds, you are treating your business like your personal bank account. I would not recommend this. If you transfer money from your business bank account to your personal checking account without proper documentation, you will be liable.
2) If you are paying for your groceries at the store and using your business funds, you are mixing.
3) Pay personal expenses with your business checking account without documentation.
These are just a few of the many reasons why you should not combine your funds. It is very important to keep your corporate veil in place. If you are not planning to do this, why form the entity and separate in the first place. Make sure that when you get paid, you put your check into your business account first and then pay yourself. If you need business supplies, buy them from the business checking account. This will eliminate any worry of piercing your corporate veil.
Remember, for tax purposes, the IRS will not allow you to deduct anything from your business that you cannot prove with documentation. Many business owners pay more taxes than they should because they lack any kind of organization in their accounting systems. If you are going to start a business, you have to get it right the first time. You should always have a personal checking account and a business checking account, both completely separate from each other. It may be a good idea to open the business checking account at a different bank to keep them “separate.”
If you are starting a business or already operating and have not parted ways with your business, take action now. Talk to experts in your local area about what works best for your situation. Everyone has a unique way of working. Continuing or developing great habits will only benefit you in the long run. We hope to see you at the top!