Is it legal to transfer money from a business …

  • Here are the 7 reasons why small business owners should not use a business bank account for personal use.

    1. It Makes it Tougher to Manage Cash Flow

    Your company’s cash flow situation becomes confusing and harder to predict when commingling your business and personal funds.

    For example, your business might not have enough funds when an important bill comes due.

    Why? Because you chose that precised time to pay personal expenses from your business account.

    Sometimes you look at your business account balance, see there’s money there, and think you can spend it but this could lead to a myriad of cash flow crisis.

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    2. It Erodes Personal Liability Protection

    If you own a corporation or limited liability company (LLC) you might be held personally liable for business debts due to commingling your personal and business funds.

    One of the key advantages you set up your LLCs or corporation is to limit personal liability for business debts, but if you operate 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 you liable for business debts.

    One-owner LLCs and corporations are most at risk of having the corporate veil pierced. You assume separation of funds doesn’t matter because you are the sole owner.

    You think, ‘Who is going to object if I use my business account for personal use?’ A company creditor, that’s who?

    If your company closes down leaving business debt behind, an unpaid creditor could pursue you with legal action.

    3. It Overstates or Understates Tax Deductions

    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 you don’t keep financial records up to date. Many times you wait until once a year at tax time to categorize expenses.

    By the time March or April rolls around, memory fades. You may have to sift through a drawer of receipts only to find that documentation is missing. Or perhaps you’ve forgotten whether something was business or personal. It’s a fertile ground for errors.

    4. It Makes Accounting Unnecessarily Complex

    Maintaining accurate accounting records is harder when you commingle.

    You have to do extra work to separate personal expenses from your business expenses. You can’t just download the bank account transaction history to QuickBooks, Xero or Zoho Books, and know that all expenses are business related.

    Instead, someone has to carefully comb through and re-categorize expenses. It’s an unnecessary manual step that saps your business productivity. Besides, memory fades and makes it all the harder to re-categorize if you don’t get to it right away.

    5. Leads to Objections By Other Stakeholders

    Shareholders, investors and business partners do not want you treating the business like it is your personal piggy bank.

    The founder of WeWork discovered this the hard way. The high-flying company, once valued at $47 billion, filed for an IPO in the summer of 2019. The filing disclosures revealed the founder’s self-dealing, including personal loans he got from the company at below-market rates.

    In other words, the founder was diverting company funds to personal purposes.

    The company’s biggest investor forced him out as CEO. In the end, he had to resign from the company he founded!

    WeWork is a high profile example. Remember, though, even in a small business with no plans for an initial public offering, stakeholders could sue for misappropriation of funds, fraud or breach of fiduciary duty. So if there are other owners or investors, paying personal expenses from a business account will eventually catch up with you.

    6. It Could Negate Part of The Subchapter S Benefit

    Commingled accounts can throw a monkey wrench into the best Subchapter S tax plan.

    A Subchapter S is an election you make with the IRS to treat taxes as a pass-through and avoid double taxation of both the corporation and the owner.

    Another advantage of a Subchapter S is that it can reduce employment taxes (Medicare and Social Security taxes) for you. Here is how it works. You (the owner) become an employee of the company. As long as you take a reasonable salary, you don’t have to pay employment taxes on corporate distributions over and above the salary.

    However, if you take non-salary distributions without keeping good track of how much you’re spending, you could run afoul of the IRS. How? By taking distributions that far outstrip your salary. Tax law requires that your salary not be unreasonably low compared to profit distributions.

    What can happen is that you lose track of how much you’re taking out of the company for personal purposes. This is easy to do when you mix personal and business expenses and don’t have good accounting controls.

    As Nolo.com states, “If the IRS concludes that an S corporation owner has attempted to evade payroll taxes by disguising employee salary as corporate distributions, it can recharacterize the distributions as salary and require payment of employment taxes and penalties which can include payroll tax penalties of up to 100% plus negligence penalties.”

    7. Makes it Harder to Profit And Grow

    The more disciplined your business is about finances, the greater the likelihood of success. If you are loosey-goosey handling bank accounts, it can cause your business to lack fiscal discipline in other ways. And that puts an unnecessary impediment in front of you.

    Any financial reports may show an inaccurate picture of the business, because they may include personal expenses. How in the world can you generate a useful Profit and Loss statement (P&L) without clean data?

    At the very least you will have to stop to clean up your data first. This robs you of real-time reporting capability.

    Overall, by mixing personal and business funds and not maintaining discipline, it becomes harder to manage the business toward profits and success.

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