Commingling of Business & Personal Funds (And Why It Is A Bad, Bad Idea)

Most business owners know to keep their business assets separate from their personal assets. However, there are many small business owners that do not. This is a bad, bad,  idea, both legally and logistically.

If you have paid the money to an attorney or to the government to set up a business entity, whether a L.L.C. or Corporation, the last thing most people want to deal with is administrative problems and difficulties like separating bank accounts and assets. However, this is a very important step to keep the limited liability of your company in tact. In law, there is a business concept called “corporate veil,” meaning the liability shield between the business owner and the business. When you commingle your business and personal funds, creditors can “pierce the corporate veil,” and get into your personal assets through liability through your business. This the the main reason to avoid commingling your funds, although there are also tax reasons.

Today,  let’s discuss the legal reasons to not commingle your business and personal funds and the ways to avoid commingling.

How do you “commingle,” and what is “commingling?”

When you commingle your funds, you are treating your business funds as your personal money, whether buying or selling. Some of the most common ways to commingle are:

Transferring money between business and personal accounts without documentation.
Writing business checks for personal reasons/expenses, and vise versa.
Having only one bank account for personal and business needs.
Depositing business checks into your personal bank account.
Withdrawing money from your business account to pay personal expenses without documentation.

It is very important to keep your corporate veil intact. As discussed above, when you commingle, your corporate veil can be pierced. Essentially, all the work that you did when forming the L.L.C. or corporation, such as filling the Articles of Organization, paying attorney or filing fees, and perhaps drafting the Operating Agreement, will be for nothing as far as limiting liability. Creditors can reach your personal assets if you commingle, and there in lies the problem with commingling.

How to avoid commingling.

First of all, the impulse to put your business check into your personal check is understandable for a small business owner. After all, you want to pay yourself and buy more supplies for the business to grow more. However, there are several reasons why  you need to deposit the check into the business bank account, and then pay yourself, and also buy business supplies out of the business account.

The first thing you should do is create a separate bank account if you have not already and document all expenses, withdrawals, and deposits. Documenting allows you to become a better bookkeeper for your business, and/or keep better records for taxes. Having better accounting by keeping separate bank accounts and only using business funds for business expenses can help you see how your business is performing, and seeing where you need improvement. It also allows you to keep your personal funds separate and helps create a personal budget since you will not be seeing business funds in your bank account.

Reducing Taxes.

One last benefit we will mention is the benefit to your taxes (and its easier for your CPA). One big benefit is that the IRS does not allow you to deduct business expenses that you cannot document. When you have one business account for personal and business expenses, it is hard to explain to the IRS what you need to deduct and for what purpose. The IRS is a lover of documentation, and by keeping track of your business income and expenses in its own business account is crucial to help minimize taxes and maximizing your deductions.

Many, if not most, small business owners pay more in taxes than they are required to because they do not have an organized system of keeping records and recording expenses. By simply creating a separate business account, and avoid commingling funds by using business money for personal expenses, you can create a more organized and efficient way to reduce liability and taxes.

If you need help organizing and/or creating your business, please contact the office of the Kathryn C. Tiffany, LLC and see if we can help you.

Audit notes problems in way city tracks funds

An independent audit of Boulder City found six issues in the way city officials handled accounting of government funds.

The problems were noted during an Audit Review Committee meeting Nov. 30; however, the audit also stated that these issues were not serious or malicious.

Completed by Las Vegas company Piercy Bowler Taylor &Kern CPA, the audit stated a number of finical documents were not consistently turned in on time under the watch of former Boulder City Finance Director Shirley Hughes. That same audit also stated that the mistakes made by city officials were fixable and not malicious.

According to auditors, a number of finical documents were not properly filled out or complete when the city turned in its finical statements for the audit.

“We need to make sure all of these documents are in and complete because it blurs the lines of what the auditors are auditing,” Finance Director Hyun Kim said.

Kim said the best way to fix this problem is to have monthly financial closeouts as well an annual one.

“We are going to create a procedure for month-end closeouts and in addition we will also keep a paper log that either me or the chief accountant will have to sign off on.”

Kim said that this matter was an easy fix that will be completed in 60 days.

The audit also noted that three bank reconciliations were not completed in a timely manner.

A bank reconciliation is the process of balancing a cash account to the corresponding information on a bank statement.

The report noted that while reconciliations were being completed, they were 60-90 days late.

“I had noticed that three separate bank reconciliations had not been completed in a timely manner,” Kim said. “This process is going to take some time, but myself and (City Manager) Dave Fraser have already allocated staff to finish those bank reconciliations.”

Kim said he plans to fix the problem by filing the reconciliations on a monthly basis, a plan that should put the city back on track and better protect it from fraud.

The audit report also noted that the city’s process for adjusting utilities was not adequate. It stated there was no process for approving a change in a utility bill by someone in upper management.

“We noticed that there was not a proper process for adjusting and zeroing out a utility bill and that caused us to lose some very significant dollar amounts,” said Doug Honey, the city’s chief accountant.

Kim recommended fixing the problem by requiring employees to have any utility adjustments approved by someone in management and then keeping a log about what adjustment was approved and who approved it.

Kim said that this problem would be fixed in 60-90 days, but that catching up could take longer.

The final discrepancy noted in the audit also had to do with late filings.

The report states that Boulder City Municipal Airport has not been filing the proper paperwork for federal grants in time. The late reports inform the federal government of annual funds given to the airport. Kim said the reports were getting done but not nearly quick enough.

He said the problem should be fixed in 60-90 days as well.

“This grant money is important and we will make sure the reports are filed in a timely manner from here on out.”

The committee has not set up a date for its next meeting but Councilman Cam Walker said that he hopes to have another meeting in two or three months.