Do you mix personal and business money in your accounts? Use one bank account for both personal and business? The accounting world calls that commingling. Someone said “commingled” on a video I was watching and the captioning translated it to “coming gold.” Well, if you are doing this kind of mix regularly, it does not mean gold is coming, or anything good is coming. I call it a “buzimess.” But how do you stop? How do you sort out your finances and then quit commingling?
When you start your business, you usually don’t have any money coming in yet. This is called pre-revenue. A nicer way of saying “operating in the red.” So you have to buy everything for the business with your own money. This is called funding your business or owner contributions. Theoretically, when you set up your business, you set up a business bank account. Then if you don’t have enough business revenue to pay for things, best practice is to put your owner’s contribution cash into your business bank account and then use that money to pay for business expenses.
When I was starting out, I tried to do exactly this. But it became pretty cumbersome right away. And seemed kind of absurd, because wasn’t it all still my money anyway?
So what is the big scary deal about mixing personal and business?
- Having a business name and entity makes your business more legitimate.
- Having accounts in your business name makes your business more legitimate.
- A business entity is used to protect your personal assets from lawsuits against the business.
- Keeping your business activities separate from personal makes for better organization. You can actually tell how the business is doing and make better business decisions.
- And the big one -If you use business funds for personal use, you could lose the protection of the business entity, which means it protects your personal assets from being taken in a claim against the business.
Let’s break this down and look at exactly which financial activities are dangerous to your business entity legally:
There are four main types of transactions that can blur the line between business and personal money.
- Purchasing business items with separate personal funds.
- Purchasing personal items with separate business funds.
- Using one bank account for both business and personal, and then you can’t tell which money is which in the end.
- Using one credit card account for both personal and business charges, even if you pay the business charges with business funds. Same as Item 4.
Item 1 is the least problematic of these and actually part of normal business operations. Even when you have business revenue coming in, you may still find yourself in a situation where you have to use personal money to buy business items or pay a business obligation. This is typically one of the ways an owner actually funds their business. Any accounting problems arise with the way these transactions are recorded on the business books. One good way is for the owner to invoice the business for the expenses they covered and then the business can pay them back. Or set up an expense report system and regular reimbursements.
Many bookkeepers don’t understand the distinction for this activity and call it commingling and try to tell you to stop. It is better to keep it at a minimum but not a serious breach if you do it. Again you just need to account for it clearly and properly.
Items 2, 3 and 4 jeopardize the business entity because it means the business is not separate so the business obligations also can’t be separated from perosnal To get into more technical terms, if the business is not separate, the corporate veil can be pierced in court and the owner can be held personally liable for business matters.
So what is so bad about Item 2? Aren’t you allowed to pay yourself from your profits somehow? So why not just buy stuff for yourself from the business checking account or put it on the business credit card? There are acceptable ways to pay yourself but this is not one of them. You can take a distribution of cash directly and that is categorized as owner distribution. Or you can pay yourself wages as an employee if your business and tax structure require you to be an employee (this is more complicated than I can cover here.)
Don’t ever use your business as your piggy bank directly. It is okay if you make a mistake now and then, grab the wrong credit card. You can reimburse the business to cover it. Just don’t make it a frequent, practice or your regular way of operating. Pay yourself cash directly and book it as owner distribution.
Items 3 and 4 are closely related. This is exactly what comingling means – all in one account. It is comingled because you can’t really say which money is personal and which is business. Under Item 4, paying for the personal charges with your personal money does not fix it. It would be better if you designated the card as either personal or business and have one or the other make the payments. If you make it a personal account then you can get the business to reimburse you for business charges as outlined above. In this case you cannot claim the interest charges are business or allocate it. It is your personal obligation.
If you make the card a business account, and charge personal items, you need to reimburse the business directly, not pay the card for those items.
How do you sort it all out and clean-up your history of mixing personal and business in your books? AKA make the bizimess a real business?
- Get separate accounts for your business. If you are unable to obtain accounts in the business name, you can open accounts in your own name but keep them strictly business. If you have a lot of personal credit card accounts, pick one to dedicate to business going forward.
- Learn how to properly handle mistakes where you grab the wrong card for a purchase. But don’t let this lead to thinking it doesn’t matter and get lax. IT DOES MATTER.
- If you have a QuickBooks or Xero account for the business, and the cards and bank accounts are all connected: Disconnect as follows:
- Accounts that will be personal going forward: disconnect.
- Accounts that will be business going forward: leave connected but be aware during the transition you will have a fair number of personal transactions transactions to account for properly.
- Go back through the prior transactions for the ones that were connected and make sure the personal items were categorized, or recategorized as owner distributions.
- It likely will be a difficult mess – a royal bizimess- to untangle the past history. If you do not have accounting software set up, it can be a little easier because you are starting from scratch.
- Or it may be a good idea to start over with a new accounting file anyway. If the accounts have around a 50-50 mix of business and personal, or majority personal, do not connect them to your accounting until you are disciplined with the separation of funds. If you connect them, you will have large numbers of transactions that will just go into owner distribution. If you don’t connect them, there is a way to upload only the business transactions to the business books. But if you don’t connect and just upload, you will not be able to reconcile. So then you will have to do some hand double-checking for accuracy. It’s a trade-off and a judgment call.
- Is there any better way to hack this? Yes!! Don’t try to untangle it yourself! Get 5-Gen Books to do it for you! We are experienced and very good at figuring out which accounts to disconnect and how to upload and/or code the transactions.
We will also coach you and encourage you as you go through your transition to a separate business with clean books. Yes , if you have been trying to avoid dealing with this for a long time, it can take some therapy from a professional to finally kick the habit. Don’t be ashamed, we all do this at the beginning. But then we learn and end up with a legitimate business to be proud of.
Don’t go it alone! 5-Gen Books is here ready to tackle it for you. Go to shop to get a quote for monthly bookkeeping services and cleanup and schedule a call with us.