After putting in the effort required to develop a product or provide a service, the last thing that applies to the majority of us is additional administrative complexities. However, maintaining a clear distinction between your personal and business bank accounts is crucial for preventing the commingling of funds for a number of reasons.
You want to spend the money as soon as you ultimately make the sale and receive the check (if you’ve ever been in business, you understand the distinction between making a sale and collecting the money).
This analysis will define the concept of commingling funds and examine the possible ramifications for a corporation or limited liability company (LLC).
What is the commingling of funds?
By commingling funds, you are treating the money of your business as if it were your own. Examples of commingling funds include:
- Client bank deposits made payable to your business are deposited into the personal bank account of the business.
- Without proper documentation, withdrawing funds from a business checking account to cover personal expenses.
- Personal funds deposited to cover business expenses.
- Employing a single bank account for both personal and business transactions.
- Composing business checks to cover personal expenditures.
- Points are earned by charging business expenses with a personal credit card.
- Transferring funds between your personal and business accounts without proper documentation.
The problem with commingling funds
“Piercing the corporate veil” refers to the risk that commingling funds could expose the liability protection of an LLC or corporation.
Having one’s “veil pierced” appears to be an undesirable practice.
If your corporate veil is pierced, the effort you put into forming an LLC or corporation—completing Articles of Organization/Incorporation, paying state filing fees, etc.—will be in vain in terms of protecting your assets from creditors.
Courts consider a multitude of factors when determining whether to penetrate the veil of a corporation and hold its proprietor personally liable for debts and litigation. A significant determinant is the existence of commingled funds. You expose your personal assets to the same level of risk if you handle the funds of your business as if they were your own.
This indicates that the requisite procedures for maintaining an LLC or corporation as an independent legal entity were not adhered to.
Create a professional mindset with a separate business account
It is impolite to combine personal and professional funds.
It is unlawful for the aforementioned reasons, in addition to being unethical in business.
Accounting is also rendered complex and inaccurate as a result. Accounting consists of more than simply preparing taxes.
Accounting provides insight into the performance of a business, highlighting its strengths and areas requiring development. Due to sloppy accountancy and record-keeping, it is impossible to determine which aspects of your business are profitable and which are not. You will be unaware of which advertisements generate the greatest return on investment or which products have the highest gross margin.
You will be completely flying unaware. A separate business checking account and a respectable piece of small business accounting software are therefore required. There are numerous viable alternatives that will suffice for online enterprises of all sizes and complexities, from the smallest to the largest.
Maintaining accurate and complete books and records, in addition to exercising diligence in segregating and monitoring business income and expenses, will significantly contribute to the preparation of the business tax return.
Reducing taxes
What can’t be documented cannot be deducted.
It is vital to maintain records of business income and expenditures in order to reduce tax liability and maximize deductions.
The majority of small business proprietors exceed the legal minimum payment amount due to the absence of a systematic expense tracking system. Monitoring expenses with a “poor man’s” method involves maintaining a distinct bank account for all business transactions. Your bank statement can be utilized as an exhaustive record of all business expenditures.
How do I correct the commingling of funds?
Perhaps you have already incorporated or formed an LLC and committed the error of commingling funds. Identification of the error at an early stage facilitates its correction. You must initially identify the transactions that constituted personal information. The IRS places significant emphasis on a number of typical expenditures, including transportation, meals, entertainment, vehicles, and home office supplies.
There are instances in which personal expenses may be reclassified. They could be converted to shareholder loans or supplementary benefit compensation.
In conclusion, the act of commingling funds may give rise to a legal issue rather than a tax dilemma. Presumably, the principal motivation behind your decision to establish an LLC or corporation was to mitigate the potential for personal liability. This protection is jeopardized when funds are mixed.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
