Laura Walter Hillstad
Who's Money is it?
You are working diligently to create a successful business. But you may need pay attention to keeping your personal and business bank accounts separate to avoid the commingling of funds.
What is commingling of funds?
Commingling of funds means that you are treating your business’s money as your own.
Some ways to commingle funds are:
· Bank deposits made payable to your business from a client is deposited into your personal bank account
· Making withdrawals from your business checking account to pay personal expenses without documentation
· Depositing personal money to pay for business expenses
· Using the same bank account for your business and personal needs
· Writing business checks for personal expenses
· Using a personal credit card for business expenses to get points
· Moving money back and forth between your business and personal accounts without documentation
Why you Shouldn’t Commingle Funds
If you commingle funds, you could lose the liability protection due to what is known as “piercing the corporate veil”.
There are several factors that courts look at when deciding whether to pierce your company’s veil and hold you personally liable for company debts and lawsuits. One important factor is the presence of commingled funds. If you treat your business’s money the same as your own, then you risk the exposure of your personal assets.
This means that you didn’t keep up the necessary formalities so your LLC or corporation wasn’t a separate legal entity.
Accounting tells you how your business is performing, what is doing well and what needs improvement. Sloppy record keeping and accounting mean you can’t figure out which parts of your business are winners and which are losers. You won’t know which products have the highest gross margin, or which ads bring the highest return on investment.
Being diligent in separating and tracking business income and expenses and keeping the books and records clean will be a huge benefit when it comes time to preparing the business tax return.
How do I Correct commingling of Funds in an LLC?
Maybe you have already started your LLC and made the mistake of commingling funds. Recognizing the mistake early makes it easier to fix. To get started you will need to identify the transactions that were personal. Some common expenses that are a high priority with the IRS include travel, meals, entertainment, vehicle expenses and home office expenses.
Those expenses that should be personal can be reclassified.
In summary, commingling funds are going to cause more of a legal problem than a tax problem. The primary reason for forming the LLC in the first place is to reduce the owner’s liability risks.
The level of importance of fixing commingled funds for an LLC will vary depending on how the LLC is taxed. An LLC taxed as a sole proprietorship or partnership is far less critical than an LLC that is taxed as a corporation. The primary risk an LLC faces when commingling funds when taxed as a corporation is the potential of losing the tax benefits like avoiding self-employment taxes on distributions.