Operating your business as a corporation or limited liability company protects your personal assets if someone sues your business.
This liability protection is vital to all business owners. The reason is that an angry customer can sue your company for accidents, defective products, negligent performance, misinformation, and more. A vendor could sue the business over a contract dispute. And a former employee could file a sexual harassment or discrimination claim. However, any protection from personal liability can disappear if you engage in a common practice. We are talking about co-mingling of funds.
What is Co-Mingling of Funds?
Co-mingling of funds is when a business owner uses the finances of a business interchangeably with the owner’s personal funds. For instance, if you own a business and use the corporate credit card to buy some groceries, get a birthday present for your child, and get a massage, that is called co-mingling.
You should always use the business bank account for business expenses. If you have a personal need, switch to your personal debit card for that purchase. And if you need money for a personal expense, but don’t have it in your personal account, then you can transfer money to yourself as a draw. But make sure your bookkeeper is tracking these transfers. You will need to be able to explain and document if a transfer from your business account to your personal account was a draw, a loan, or salary.
Why Is Co-Mingling a Problem?
Having a history of co-mingling can remove your limited liability protection. In a lawsuit, the plaintiff’s lawyer will subpoena your business records, and this will show the co-mingling. This will allow the court to hold you personally responsible for a liability that would otherwise be stopped by the business entity. You could even be accused of fraud or embezzlement.
Your disregard fo the business as a separate entity will show through in your co-mingling transactions. Therefore, the court may treat you as a less credible witness. After all, you were not trustworthy in spending business funds.
Common Examples of Co-Mingling Funds
Many people think of their business as their “baby.” However, they still must keep the business financials separate from personal financials. Read these examples of co-mingling. Then put procedures and systems in place to ensure none of these are happening in your business:
- Depositing business checks into your personal account
- Paying a business expense with personal money
- Not opening up a business bank account
- Transferring money between your personal account and business account without a business-related reason
- Purchasing significant items through the business that are unrelated to the business
Start your business off right by opening a company account and keeping finances separated.
Do you have questions regarding co-mingling of funds? If your personal and business finances are getting a little muddy, we can help. Protect yourself by clearly separating your personal assets and bills from your business expenses.