Commingling: Why Entrepreneurs Should Never Mix Personal and Business Funds
Do you want an easy tip to simplify your business finances? What about an easy way to save money and time? A quick tip to help reduce overwhelm?
It’s one of the basic principles when starting a business, yet some business owners still allow their business and personal funds to mix and mingle. Don’t be one of them.
It’s not sophisticated or complicated, yet many business owners overlook this simple way to keep their business running smoothly and to simplify gathering data at tax time.
Let’s discuss the benefits of keeping things separate and the risks and pitfalls of commingling your business and personal funds.
What is commingling anyway?
Simply defined, commingling means mixing together. Regarding finances, this means using the same bank account to make business and personal purchases or depositing earnings received in the course of business into your personal account. Here are a few examples:
Ella Entrepreneur goes for her weekly manicure and inadvertently pulls out her business debit card when it’s time to pay.
Owen Owner heads down to Office Depot to get supplies for the office. He realizes she doesn’t have enough cash in the business checking account, so he pulls out her personal debit card and pays for the supplies.
Benita Businessowner runs into a client of hers who owes her for a job she completed. The client offers to send her the payment through Zelle, and Benita’s Zelle account is connected to her personal checking account. Not wanting to forego payment, Benita accepts the offer.
Joker John opens a business bank account. He has heard that he can write off many things as a business owner, so he pays for everything, and I mean everything, through the business and figures it will all work itself out.
With the exception of Joker John, the above examples may be once-off events and can be corrected by transferring the funds between the accounts. For example, Ella Entrepreneur can transfer the amount of her manicure from her personal account to the business account to pay herself back (and vow never to make that mistake again).
What’s the harm?
Don’t business owners take advantage of loopholes all the time? Why not run everything through the business account?
Here are a few reasons to keep the funds separate.
Gain clarity of your business performance
If you run everything through the business, you won’t know the value of the business. Maybe you’ll know that you have more than enough cash to get the things that you need, but you won’t have a true understanding of what the real financial drivers in your business are.
Without this, your ability to make clear business decisions can be impeded because you lack the awareness to know how each decision moves the lever. This leads to a different topic — how frequently you can review your numbers — which is covered in a different article to come.
Save time and money
If you pay for business expenses from your personal accounts, you might miss out on legitimate tax deductions. When tax time rolls around, it’s beautiful to have your business’s activities neatly identifiable. But, when you have to comb through a year’s worth of statements, evaluating each transaction to determine whether it’s business or personal, it can be frustrating and time-consuming. Save yourself the headache and adopt the discipline of keeping things separate on the front end.
When you clearly delineate between business and personal finances, preparing financial reports and applying for funding sources is easier. When you hear about a grant, loan, or outside investor, expect them to request a Profit & Loss statement. This is a straightforward project if you exercise the discipline of separation.
On the other hand, it’s costly and frustrating to unravel. You can hire an outside accountant or bookkeeper to compile your financial reports, but please be aware that they won’t be certain of which transactions are business or personal. This might mean repetitive emails asking for your input or worse, items misclassified which could set you up for audit risk in the future.
Protect your business status
Corporations and LLCs are set up specifically to limit your personal liability. That is, if the business is found liable for something, your personal assets aren’t at risk. When you commingle, you risk jeopardizing this status.
Please don’t lose your house because it is more convenient to pay for groceries with your business card.
Simple solutions to avoid commingling
When there’s no money in the business to cover an expense, paying for it from your personal checking account can be tempting. Don’t do it. Here are simple tips for keeping your business and personal expenditures separate.
Pay yourself regularly
This is a critical step if you need to rely on the business to pay your personal expenses. Whether you’re just starting out or have been in business for a while, you will need to pay yourself on a regular basis.
For starters, you can take a percentage of the revenue that comes in and transfer it to your personal account. You may also pay yourself a flat amount on a regular schedule (like every two weeks), and then pay yourself a bonus periodically.
The book Profit First outlines a great method for handling this.
Lump-Sum Transfers Only
If you run short of funds in your business or personal account, transfer lump sums to cover the expenses. These will be treated as investments into the business or distributions from the business.
Make transfers easy
Set up your business and personal accounts at the same bank so you can easily transfer funds between the two accounts.
Transfer a lump sum from one account to the other if you don’t have enough before making the payment.
If you transfer from your personal account to the business, this is considered an investment into the business
If you transfer from your business to your personal account, this is considered an owner’s draw.
Get distinct cards
Sometimes, business owners pull out the wrong card when it’s time to pay. Minimize the risk of this error by asking the bank for a different design on one of the cards, or you can even put a sticker on one of the cards (remember which one). I’m sure you can find a creative solution!
Correct mistakes quickly
What happens if you do pay for a personal expense from the business? Reimburse yourself. Make a transfer for the exact amount to fix the “oops” and move on.
Keep a healthy distance between your personal and business finances as you might do in personal relationships. As an entrepreneur, I know that I pour my heart and soul into my businesses, but when it comes to our finances, we’ll save a lot of heartache by keeping them separate.
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