Stop Mingling Personal and Business Funds
(3 minute read)
Being self-employed, or a solopreneur, is hard enough as it is, don’t deliberately make it even harder! More importantly, do not risk losing your small business dream to sloppiness and error. One of the quickest ways to financially damage your business is to mingle personal and business funds. Co-mingling has many different aspects, some of them rather technical, others more simple and obvious. Bottom line, make it easy on yourself, eliminate all doubt and increase your likelihood of success by separating your business and personal finances, beginning today! In order to motivate you to action, allow me to share some of the detrimental consequences, actually suffered by the self-employed and solopreneurs, for failing to separate their business and personal funds.
1) Commingling increases your tax liabilities and minimizes your tax deductions. Tracking legitimate expenses and potential deductions becomes much harder to do, even for a forensic accountant, if you fail to maintain separate accounts. Bottom line, you may end up paying more in taxes than the law actually requires. Ouch!
2) Commingling makes it very difficult to accurately assess the financial health of your business. An entirely curable warning sign, regarding the financial fitness of your business, may be staring you in the face, but your muddled, commingled finances make it impossible to detect.
3) Commingling may cause you to lose some of your business liability protections, such as your LLC status. If the IRS determines that your business venture is simply a personal hobby, as evidenced by the constant comingling of funds, your legitimate business operation may not survive an audit.
4) Commingling increases the likelihood of an IRS Audit. As previously mentioned, if your business venture takes on the appearance of a hobby, due to inaccurate or incomplete accounting, you are only inviting the IRS to inspect your books.
5) Commingling causes your internal business “data” to be unorganized. Even if your business is viable and turning a profit, you significantly handicap your ability to make informed, real time decisions.
6) Commingling decreases the likelihood of securing business financing from outside lenders. During the due diligence process, a prospective lender may reject your loan application based entirely on the fact that you commingle funds.
7) Commingling decreases the likelihood of attracting outside investors. If, during the due diligence process, a potential investor senses that he or she may be partially funding your personal expenses, it could be a deal killer. At very least, it is likely to detrimentally impact the terms of investment.
8) Commingling of funds could destroy your personal credit. You may have worked very hard, over a long period of time, to establish sound personal credit. But when you suddenly introduce the potentially volatile element of daily business operations on top of your personal finances, it could serve to undermine what you worked so hard to build.
9) Commingling serves to cultivate a sloppy, undisciplined and unprofessional mindset when your business and personal lives become inextricably merged.There are many legitimate reasons to separate the two, this is the number one reason.
10) If you plan to sell your business someday, commingling makes it very difficult, if not impossible, for a prospective buyer to perform an accurate appraisal. Not only that, the mingling of personal and business funds may serve to spook a prospective buyer from further negotiations.
For these reasons, we highly recommend that the self employed and solopreneurs do the following:
1) open a separate business checking account;
2) secure a dedicated business credit card and/or debit credit card;
3) pay yourself a salary;
4) maintain organized receipts;
5) maintain organized invoices;
6) routinely review business expenditures;
7) track business use of personal items;
8) track personal use of business items;
9) familiarize yourself with IRS publication 535 (Guide to Business Expense Resources);and
10) utilize small business cash flow technology, such as software or an app, to do the work for you and to keep you out of trouble.
Let's do this!
