Why you should avoid using business accounts for personal expenses
Using a business bank account or credit card to pay for a personal expense may not seem like a big deal if you just reimburse the business soon after. This is especially true if you are a practice owner. There can be many adverse consequences from engaging in these seemingly inconsequential acts. Although it is not technically illegal (Bankrate), you should avoid it at all costs. The following list enumerates reasons you not to use business accounts and cards for personal expenses.
1. It’s an accounting nuisance.
Trying to separate personal expenses from your business ones in your bookkeeping system can wreak havoc in your accounting routine. The personal expenses can skew your business’s financial dashboards and reports and make it harder to analyze the true financial status of your company. It also is time consuming to decipher which expenses go where.
2. You can lose your corporate protection.
If your practice is a corporation or a limited liability company (LLC), you run the risk of “piercing the corporate veil”. The owners or shareholders of a corporation or LLC are personally protected from any legal penalties their company receives. However, this protection can be voided when owners fail to recognize the separate identity of their business (such as using a business account for a personal expense). This means if your business goes bankrupt, faces a lawsuit, or anything else of that nature, there’s no longer a legal barrier protecting your personal finances and assets. If you don’t treat your business separately from yourself, the legal system doesn’t have to either.
3. It can cause tax troubles.
Business expenses are usually tax deductible while personal expenses are not. Not only will mixed expenses make it harder to file your taxes, but if you accidently include personal expenses in your business expenses and later are audited, you could face fines, back taxes and stricter monitoring from the IRS.
4. Your cards and accounts can be cancelled.
When you sign up for a business credit card or open a business account, you represent that use of such accounts is for business. By using these accounts personally, you may increase your risk of account closure.
The best way to avoid commingling personal and business expenses is to keep the two as separate as possible. If you are an owner, pay yourself a salary as you would any other employee. Also, although it may not be as problematic it is good to try to avoid using personal money for business expenses, make sure you are reimbursing yourself (through an accountable plan) and your employees as soon as possible for any business expenses that are incurred using personal funds, or better yet, provide employees with a pre-paid business card. The bottom line: just don’t mix personal and business funds.