Last week we discussed in a FB post the idea of co-mingling. Today we are going to get into more detail about this important subject!
As a reminder, co-mingling funds is when you combine or otherwise entangle your personal funds with your business funds. Some common examples of this is paying personal bills with the company credit card or drafting personal house expenses from the company account or visa-versa. Using personal funds to pay business bills directly.
Keeping your business and personal finances SEPARATE by using the proper accounts for your business income and expenses is VERY important. Among the best benefits of this is increased clarity in your business finances, as well the protection of your personal assets in the event that your business was sued. Many business owners do not realize that they can (in effect) negate the protection of their LLC by choosing to co-mingle funds. There are many precedents where the courts decided that because the business was co-mingled with personal finances, the personal assets were up for grabs too!
What you can do instead of co-mingling funds when you need to pay a personal bill from business funds or pay a business bill with personal friends? There are a couple of ways.
Depending on the type of entity your business is, an LLC you could take an Owner’s Draw or as a corporation, a Shareholder’s Distribution when you are trying to get funds for your personal use. When you are contributing your personal funds, you would record the transaction as an Owner Contribution as an LLC or Capital Contribution as a corporation shareholder.
Also, as an active Owner in a corporation, (not an LLC) you are entitled to payroll funds for the work you put in at a reasonable compensation which could alleviate the need to make distributions for personal expenses.
To keep your bookkeeping clear, be sure to use personal credit cards and banks and business credit cards and banks. Always keep your funds separate.
Note: Always check with your tax attorney or CPA for clear guidance! These tips are provided for helping you keep your bookkeeping records clean and concise and should not be construed as tax advice of any sort.