Recently I was hired as a bookkeeper for a small manufacturing business. My boss, the owner, uses the business bank account for personal use – and it’s driving me crazy! He withdraws money with a debit card for personal expenses. Last week his wife bought a big screen TV for their home using a blank check he signed from the business account. From one day to the next I never know how much money the business will have. I’ve explained that it’s best practice to separate business and personal funds, but he tells me it doesn’t matter since the business is an LLC and he is the sole owner. Who is right? My boss? Or me? And what should I do?
Business owners should not use a business bank account for personal use. It’s a bad practice that can lead to other issues, including legal, operational and tax problems.
As the company grows, the problems will also grow. That is, if the company is able to grow. Many businesses operated in a fiscally-lax fashion don’t grow the way they should or could.
I suggest you provide the business owner with a copy of this article. It has all the reasons to help you convince him. At the end is a list of best practices to follow.
Here are 7 reasons why small business owners should not use a business bank account for personal usemingling raises the following dangers:
For example, the business might not have enough funds when an important business bill comes due. Why? Because the owner chooses that precise time to pay personal expenses from the business account.
Some owners look at their bank balance, see there’s money there, and think they can spend it. This could lead to a cash flow crisis.
An owner of a corporation or limited liability company (LLC) might be held personally liable for business debts due to commingling personal and business funds.
One of the motivations for owners to set up LLCs or corporations is to limit personal liability for business debts. But if the owner operates the business as if it doesn’t exist separately, such as by paying personal bills out of a business account, that protection could go out the window.
Courts have been known to “pierce the corporate veil”. This means they can hold the owner liable for business debts.
One-owner LLCs and corporations are most at risk of having the corporate veil pierced. Their owners assume separation of funds doesn’t matter because they are the sole owner. They think, ‘Who is going to object if I use my business account for personal use?’ A company creditor, that’s who.
To qualify as business tax deductions, expenses have to be for business purposes. When you pay personal bills with a business bank account, it makes it harder to identify business expenses. As a result, you may overlook legitimate deductions. Or you could mistakenly categorize personal expenses as business, leading to penalties and a big tax bill from the IRS if you get audited.
This problem is compounded when owners don’t keep financial records up to date. Too many owners wait until once a year at tax time to categorize expenses.
By the time March or April rolls around, memory fades. They may have to sift through a drawer of receipts only to find that documentation is missing. Or perhaps they’ve forgotten whether something was business or personal. It’s fertile ground for errors.