Commingling of your money puts you in danger
It’s easy to think you are your business. Who else is doing the work, right? However, that thinking is NOT accurate. In fact, your business is a separate entity from you, the individual. Your business has a Federal EIN number as its identification and you have a social security number for your identification. Moreover, for tax purposes, it is important to keep your business and personal finances separate. Most importantly, you must have a separate business bank account. If you don’t have a separate business bank account, you run the risk of “piercing the corporate veil” and leaving yourself exposed as the entity responsible for your business’ liabilities and debts.
Why you should NOT commingle finances
To avoid piercing the corporate veil, you cannot commingle your business and personal finances within the same account. Rather, it is better to create clear and obvious delineation between the two entities (you and your business). Business income and expenses, including credit cards or debit cards, should only be active within your business bank account. In the same way, all your business transactions should not have any interaction with your personal credit card or debit card. If you casually ignore this financial separation, you run the risk of being personally liable for the company’s debts.
Moreover, because your business is a separate entity, you should be operating your business like a true corporation. You should be having meaningful board meetings with motions, records of minutes and history maintenance. Ultimately, you are the individual who works for and within your business entity. You are making clear to the IRS that you are running a business and not a personal hobby.
Save Yourself Time
By separating your personal and business expenses, you will make your accounting and bookkeeping much simpler. You will spend less time sorting through all monthly transactions to determine if each entry is a business or personal entry. Therefore, be smart with your time. Determine beforehand if your purchase is for business or personal use. Then use the appropriate purchasing tool (credit card or debit card or online account) to make the purchase. Again, be sure to make payments from your business checking account for business only related items. Don’t commingle your finances by making payments for personal charges with your business checking bank account.
Pay yourself a check
Create a further separation between you and your business by paying yourself a salary. By putting yourself on payroll, you make it obvious that you work for the business entity as an employee. Therefore, you must withhold any and all tax requirements, payroll taxes and self employment taxes before writing yourself a physical check. The money from your paycheck will be the source of funds to pay your personal expenses. As a result, this will further prove to the IRS that you are maintaining a clear separation between your business money and your personal money.
Perhaps you are one of the many business owners I know that personally setup your own business entity. However, did you setup everything correctly? More importantly, what business and payroll errors did you create along the way? I have seen it often in small businesses. Sadly, these types of errors are often very costly to your business. So, let us help you ensure it is correctly setup. We specialize in small business accounting and taxes in Canton, GA; Woodstock, GA; Marietta, GA; Alpharetta, GA; and Kennesaw, GA.