Commingling Of Funds
According to Black’s Law Dictionary, ‘commingling’ is defined as, (Of a fiduciary) “to mix personal funds with those of a beneficiary or client.”
Even as a small business, it is important to set up separate accounts for your business and personal needs.
Lots of Entrepreneurs get so carried away with the exhausting, but exhilarating tasks of being a new business owner. They become absorbed in creating products, or selling their services, and the last thing most new Entrepreneurs want, is to have additional administrative hassles, and so they take shortcuts to make their lives easier as they focus on running their business. One of these shortcuts is, running the risk of a bad money practice – ‘commingling ’. As a result, some important business basics are left undone, or rather, not done at all.
One key area that new Entrepreneurs (or rather, all Entrepreneurs) need to pay attention to, is the handling of their finances. In the mix of trying to get business done, keep sales up, and already wearing many hats, business owners often commingle their funds. ‘Commingling ’ means the clashing or mixing of one’s personal and business accounts.
Commingling makes it difficult for business owners to keep correct calculations of their business’ cash flow, resulting in great problems when it comes to filing personal and business taxes.
So in actuality, Entrepreneurs should practice keeping their personal and business bank accounts separate, so as avoid the commingling of funds.
How ‘Commingling’ Can Impact Your Business
Entrepreneurs are placed with the greatest responsibility when a sale is made and money is collected. They have to fight the urge to spend the money that comes in. I totally get that. I understand that there’s much to do with the money that’s finally coming in, but let’s look for a bit, at how what we do with that money, can affect our business and what commingling of funds means, along with the potential impacts to your business.
What Is Commingling Of Funds? How Do I Commingle?
When you commingle, it means that you are not treating your business as a separate entity; you are treating your business’s money as your own. Commingling can happen when you:
- Deposit your client’s cheques into your personal bank account
- Use your business’ funds to pay for personal expenses like groceries, pay residential bills, etc, without proper record-keeping to identify such transactions
- Dispose of your personal funds to pay for business expenses such as stationery, paying suppliers, travel etc.
- Use the same bank account for your business and personal funds
- Use your business cheque books to write cheques to cover personal expenses
- Use your personal credit card for all expenses – personal and business so you gain points
What Happens When You Commingle Funds as an LLC (Limited Liability Company)
The primary reason for forming a business as an LLC in the first place, is to reduce the owner’s liability risks. When you commingle funds, you do just the opposite and you increase or take away your liability protection.
“Your veil is pierced.”
When you commingle funds, you risk losing the liability protection due to what is known as “Piercing the corporate veil”.
‘Corporate veil’ is a legal term used to describe the proper business practice of keeping business funds and personal funds separate, clean and well documented. When business owners commingle their business and personal funds, they can end up getting their corporate veil pierced.
Having your “veil pierced” is as bad as it sounds. This means that certain actions have caused your personal belongings and wealth to be at risk.
When you commingle, you lose the single greatest advantage to having the entity structure.
Legal issues can make your incorporation efforts all seem in vain if your veil has been pierced.
Once the issue of piercing a company’s "veil” has gone to the courts, and they identify the presence of commingled funds in transactions, they will hold you personally liable for company debts and lawsuits. You have therefore removed your LLC shelter, and exposed your personal assets.
A Business Mindset Is Needed
At the initial stages of getting into business, enter the business world with a professional mindset.
Mixing business and personal funds is certainly not recommended, and it is definitely asking for legal trouble. Commingling is considered unethical, and in many cases, illegal.
It also makes accounting difficult and inaccurate. Accounting does not only mean just doing your taxes.
Accounting shows your business’ financial position at given periods and it tells you how your business is performing. Poor record keeping and accounting reflects badly on your business, you won’t be able to identify which products have the highest gross margin, or which ads bring the highest return on investment.
I’ve Already Started My Business And Commingled Funds. What Do I Do Now?
So you’ve recognized it. Now Stop!
You will simply be operating out of financial confusion. That’s why you need a separate business checking /saving account (as may be applicable in some cases). Start viewing your funds as two separate entities. You could also choose to hire a professional accountant, (we have several recommendations) or if you are knowledgeable and have the time, you can explore options like Quickbooks or Wave. 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 My Business?
Recognizing the mistake early makes it not so difficult to fix and adjust. You will first need to identify the transactions that were personal, and if you kept receipts and bills, start reclassifying by separating the business from the personal. Pay attention to some of the more common expenses like travel, meals, entertainment, vehicle expenses and home office expenses.
In summary, though you run the risk of losing your tax benefits, commingling funds are going to cause you more of a legal problem than a tax one.
