As an independent contractor or business owner, it’s often difficult to separate your personal life from your business life. The home office often doubles as the kitchen table and the line between business purchases and personal expenses can often become blurry. Keeping your business and personal accounts separate to avoid commingling of funds is one of the ways to ensure that your corporation can continue to act as a veil between your business assets and your personal assets.

What is “Commingling?"

Commingling is when business owners use business funds as their own. Some ways people commingle funds are:

  • Depositing checks made payable to your business into your personal bank account
  • Making withdrawals from your business checking account to pay obvious personal expenses without the proper documentation
  • Using the same bank account for your business and personal needs
  • Writing business checks for personal expenses
  • Moving money back and forth between your business and personal accounts without documentation

Why is it so important to keep business and personal funds in separate accounts?

Healthy Amount of Separation

Asset Protection. One of the primary reasons people form an LLC or S Corp is to achieve personal asset protection. In the instance of financial hardship or legal action against your corporation, however, the courts may deem it appropriate to “pierce your company’s veil” and hold you personally liable for the company’s debts or lawsuits.

There are several factors the courts investigate when deciding whether to pierce a company’s veil, but one of the key factors is the presence of commingled funds. Therefore, if you treat your business’s money the same as your own, you risk the exposure of your personal assets. To avoid the risk of personal liability, comply with the rules governing the maintenance of a corporation (such as keeping proper meeting minutes and holding annual meetings) and maintain a separate business account.

Accounting. Mixing business and personal funds can also make accounting for your company difficult - or worse - inaccurate. Accounting is more than just doing your taxes. Accounting tells you how your business is performing. Mixing business and personal purchases in the same accounts make it difficult to ensure that all legitimate deductions are captured on a monthly basis. When record keeping is sloppy you can’t be sure which parts of your business are doing well and where you might find improvements or reduce costs. That’s why it’s so important to implement business only accounts for cash and for credit card purchases.

Taxes. In addition to proper accounting, keeping your tax records and receipts separate and well-documented can ensure you’re receiving every legitimate tax deduction and protect you from an audit. As the old saying goes, “Keeping your books in order keeps the tax man from your door."

A few helpful tips on taxes:

  • You can’t deduct what you can’t document. If it’s unclear whether an expense is business or personal, make a concerted effort to document it right away so you don’t miss out on the deduction come tax season.
  • Most small business owners pay more than the law requires because they don’t have a separate system for keeping track of business expenses. Using helpful software or a trusted bookkeeper such as ATBS can ensure you’re not paying the IRS more than you should.
  • Whether you intend to do your taxes yourself or you intend to use a tax specialist, keeping your records and receipts separate will save valuable time sorting and will ensure a deduction doesn’t get accidentally missed.

As an independent contractor or small business owner, you always want to maintain the professionalism of your business. In additional to keeping your business profitable and running smoothly, it helps enhance your image of professionalism if you keep your business finances separate from your personal finances. If you take your business seriously, it will be apparent to your clients.


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