5 Things They Didn’t Teach You in Business School: Commingling Funds | Part 1
Starting a business is an exciting journey, but there are critical financial habits that business owners often overlook—habits that could make or break their success. One of the most common yet dangerous mistakes new business owners make is commingling funds—mixing business and personal transactions in the same bank account. While it may seem harmless at first, this practice can create serious legal, tax, and financial issues down the road. Let’s break down why keeping business and personal finances separate is non-negotiable for a successful business.
What is Commingling Funds?
Commingling funds occurs when business and personal finances are mixed together, meaning personal transactions are made from a business account or vice versa. This can happen in several ways:
- Using a business debit or credit card for personal expenses like groceries or vacations.
- Depositing personal funds into the business account without proper documentation.
- Paying business expenses with a personal credit card or bank account.
- Transferring money back and forth between personal and business accounts without a clear paper trail.
Why is Commingling Funds a Problem?
Mixing business and personal funds can lead to a host of complications, including:
1. Legal Liability Risks
If your business is structured as an LLC or an S-Corp, commingling funds can jeopardize the legal protections these entities provide. The concept of “piercing the corporate veil” means that if you don’t maintain a clear separation between personal and business finances, courts may hold you personally liable for business debts or lawsuits.
2. Tax Headaches
Come tax time, having mixed finances makes it difficult to accurately report income and expenses. You may end up missing legitimate deductions or mistakenly claiming personal expenses as business ones—both of which can lead to IRS audits and penalties. Keeping separate accounts ensures cleaner record-keeping and minimizes red flags.
3. Confusing Financial Records
Accurate financial records are essential for making informed business decisions. If business transactions are scattered among personal accounts, it’s nearly impossible to get a clear financial picture.
- How much profit is your business actually making?
- What are your biggest expenses?
- Are you managing cash flow effectively? Without clear separation, these questions are harder to answer.
4. Paying more for bookkeeping services
When you are swiping your business card to pay for personal transactions, you’re creating more work for your bookkeeper (unless you’re bookkeeping is tracking your personal expenses). This is why we highly recommend taking a draw (sole proprietor or LLC) or payroll (s-corp) for all of our business owners—so we are not tracking all of your personal expenses within the business.
How to Keep Business and Personal Finances Separate
The good news is that preventing commingling funds is simple if you establish good habits from the start. Here’s how:
1. Open a Business Bank Account
One of the first things you should do after starting a business is open a dedicated business checking account. This will help ensure that all income and expenses related to your business are kept separate from personal transactions.
2. Use a Business Credit Card
A business credit card helps separate expenses while also building your business’s credit profile. Be sure to use it only for business purchases.
3. Pay Yourself a Salary
Instead of taking money randomly from the business, establish a set salary or owner’s draw and pay yourself at regular intervals. This creates a clear distinction between business income and personal income. Additionally, you’ll see what is happening with your business finances more clearly when you do this.
4. Use Proper Accounting Software
Software like QuickBooks Online or Xero make it easy to track business finances separately. These tools also allow you to link your business bank account for seamless bookkeeping and reporting.
5. Work With a Bookkeeper
A bookkeeper can help you set up your financial systems correctly and ensure that your records remain accurate and audit-proof. If you need guidance, Lookout Bookkeeping is here to help you implement best practices that will keep your finances organized.
Final Thoughts
Commingling funds might seem like a minor issue in the early days of your business, but it can lead to major complications down the line. Establishing good financial habits now will save you time, money, and stress later.
If you’re struggling to separate business and personal finances, or need a better bookkeeping system, fill out our intake form. Don’t forget to grab our free resource, Bookkeeping Checklist, to ensure your business is on the right track!
