3 Reasons Commingling of Funds is Bad for Business
Every entrepreneur makes mistakes at the start of their business. While others can recover quickly and bounce back to profits, others find it challenging to stay afloat. Commingling of funds is one seemingly harmless mistake that can ruin all your hard work. This is an easy trap to fall into when you have a lot to handle on your plate.
First, what happens when you commingle funds? Commingling funds means you treat your personal and business assets as a single entity. This can look trivial at first, especially if you are working with small capital but with long-term side effects. In this article, you will learn some examples of commingling, the harm it can cause in your business, and how to restructure for balance and growth.
Some common examples of commingling funds
- Undocumented transfers or withdrawals between your personal and business account
- Merging both your business and personal bank accounts
- Using business income for personal expenditure
- Accepting payments from clients to your personal account
- Using your personal credit card for business expenses
As a business owner, you might be guilty of one or two of the above. It might seem inconsequential at first but then becomes very time-consuming to separate business assets from personal assets. That is only one drawback. There are many cons to commingling of funds that can leave your business in a bad state.
Why commingling of funds can harm your business?
- Legal issues & tax deductions
Two major aims in any business are to minimize costs and maximize profits. In accounting, you target minimizing taxes and maximizing deductions. However, commingling of funds means you lose out on some tax benefits you would have gotten in your business. How does this work? Since business expenses are deductible for taxation, merging your personal finance and business assets will blur the lines. However, if you work with organized business records, it reduces adverse consequences when it comes to the IRS and your taxes. Commingling of funds will make any financial audit on your firm difficult to manage. Remember that the IRS only allows deductions on documented business expenses.
- Make accounting difficult
A crucial part of owning a business is accounting. If your books are in order, it is easy to track any mishap that can affect your business. Commingling of funds means you do not have adequate financial records of money flowing in and out of your business. How then do you determine if you are making profits or losses? It might seem like a tedious task at first, but a good business owner knows the importance of being a professional, and no professional mixes personal and business finances. So, commingling of funds only makes performance tracking even more tedious.
Personal assets unprotected
Usually, your personal assets are protected by a “corporate veil.” This means that creditors cannot touch your personal assets, but commingling funds may allow creditors to “pierce the corporate veil.” Yes, it sounds painful to the ears and for your business too. Also, when you start a business, you go through enough legal documentation to establish it as a separate legal entity. Commingling funds will only take you two steps back because you can lose liability protection if you fall into any lawsuit. You will not escape your firm’s debts, and you can lose your personal assets if you keep merging both business and personal finances.
Dealing with commingled funds
Now that you are aware of how dangerous commingling of funds can be, how do you stay out of this deep hole?
- Create separate accounts
Always create different bank accounts for yourself personally and your business so you can give your business’ details to investors and other interested parties. Also, avoid personal spending from your business account. This will help you split costs and maintain the professionalism that comes with building a business. Your business is respected as a legal entity, and you should run your business as such.
- Contact a CPA
What if you have already gone too far with commingling funds? How do you move forward? The best way is to contact a specialist in the accounting field. A certified public accountant can help you sort your finances and avert any legal implications that can arise from the commingling of funds.
- Hire an assistant or outsource
It is okay to be occupied with other aspects of business, from marketing to closing leads and other items on your daily list; keeping tabs on your business finances might be a daunting task. You can always hire an assistant to help track your spending and document items in the right order. Also, there are so many virtual accounting systems that can be considered to make the workload less tiring.
Another option to take this task off your plate is to outsource to an accounting firm like ERJ Services. The advantage of doing this is that you are not just tracking numbers, but you get the benefit of working with expert professionals to help you project, track, review, and analyze so that you are positioned for profits.
Growing a business is not a walk in the park but having a stable structure that you can count on makes things easy for you. To avoid wasting all your years of hard work and accumulated profits, do not commingle funds. Also, speaking to a professional with vast financial experience will help point you in the right direction. You can Book a Consultation to discuss implementing a financial structure to support your business growth today.