Do you know what it means to commingle funds?
It’s when your personal account and your business account get a little cozy.
What does it mean to commingle funds?
It’s when they serve the same purpose, or maybe they’re one and the same. If you don’t know when this is an acceptable practice, keep reading.
Ever go to a party and everyone’s having a good time? And I’m not talking about a raucous party, maybe even a small gathering and everything’s just going smoothly.
And then all of a sudden someone shows up and the dynamic changes, and maybe now it’s a little awkward or it’s a little uncomfortable.
Well, this is what happens in business. If you’re commingling your funds, right? So everything’s fine until the IRS shows up.
Now, it’s an awkward moment.
When is it acceptable to commingle funds?
Now, generally speaking, it’s a big no-no to commingle funds, but I get it. If you’re starting as a sole proprietor, a lot of people start with a personal bank account.
Now I do advise getting a separate business account anyway, but as a sole proprietor, if you have a personal account for your business, it’s generally a little bit more acceptable because as a sole proprietor, you are 100% liable for your business.
Anyway, it is not a separate entity from you. You are your business where this becomes an issue then is when you decide to become an LLC or a corporation.
Because by organizing as one of those entities, you are essentially separating your business from you as an individual. And that’s exactly what gives you that liability protection.
A Separate Business Account Protects You
That’s exactly why someone, if, if anything were to assume in a lawsuit, they could only go after the assets in your company, not after any of the assets that you own personally, but if you’re operating as an LLC or a corporation and you decide to commingle funds, now what you’re doing is you’re saying “I am my business.” We are one and the same.
And if you do that, you’ve just eliminated the liability protection that your business structure just offered you.
Now, I’ve spoken to many business owners who started as sole proprietors, and when the time came and their business grew and they decided to become an LLC, or they decided to become a corporation, but they still maintained that bank account that they had set up as a sole proprietor.
And maybe it was too difficult to change it or whatever the reason is. But the problem is that bank account is tied to their social security number.
And if it’s tied to your social security number and you’re using it in your corporation or your LLC, which has a different tax ID number, you’re now saying me and my business are one and the same.
And if you do that, you’ve just lost that liability protection. Now I’m not saying this increases your chance of an audit risk by doing this.
But I am saying if an audit ever happened, you would actually have a problem on your hands.
And I’m not a fearmonger.
So I’m not saying it’s gonna increase the risk, but just know the consequences of your decisions.
Know the potential pitfalls that you could fall into if you decide to commingle funds.
So be knowledgeable because no one, no one wants to have an awkward party.