The mixing of personal and business finances is especially common in the beginning stages of business. It is something that you should work to separate as soon as possible. Mixing personal and business finances is dangerous. This makes it hard to see what your cash flow in the business is, and puts you at risk of legal trouble. We are here to tell you why mixing personal and business finances is one of the worst things you could possibly do for your finances, and how to fix it if you’ve found yourself in this situation.
The mixing of personal and business finances takes away the legal protection of your LLC. If your company is sued or the IRS puts a lien on the business funds, then the personal funds will also have that lien. A lien is what gives the IRS the right to go into your account and take what is owed (oh yes, without permission). When you mix personal and business finances the money acts as one, therefore it can be taken as one.
Additionally, if you are ever audited by the IRS, it will be harder to explain and justify your purchases made for the business. You could have spent $500 at Office Max for the business, but if the account is commingled with expenses from Sephora too, you’re probably going to have a hard time proving that $500 was entirely office supplies.
The easiest way to rectify the situation is to have separate bank accounts for your personal funds and business funds. If you don’t have an LLC (Limited Liability Company) set up for your business, you’ll need one to set up a business account for extra security. There are different requirement to get started depending on where you are located, so make sure your do the appropriate research.
Lastly, you will need to have a reputable and documented trail of reimbursements for expenses between bank accounts – it isn’t enough to simply transfer money from one account to the other. The best way to document these “transfers” is by writing yourself a check or utilizing a software like bill.com and adding yourself as a vendor, which is what we do.
If you have fallen into the habit of mixing personal and business finances, we hope that you take these tips to heart and make the necessary changes to ensure financial security for your earnings. If you have any questions about getting started, please do not hesitate to send us a message, or set up a meeting with us. Don’t forget to check out more important tips for business owners in the GML CPA blog.
Thank you, Jodi Krause, for your expertise and input in the creation of this post.