141: Stop Commingling Funds Whether You Are Starting A Business Or Side Hustle, A Solopreneur
141: Stop Commingling Funds Whether You Are Starting A Business Or Side Hustle, A Solopreneur, Entrepreneur, Mompreneur, Freelancer, Bookkeeper, Virtual Assistant, Business Owner, Or Self-Employed
Commingling funds in your business is a mistake many business owners make, whether it is intentional or unintentional. There are times when funds may be commingled accidentally and others when it is being done with no knowledge that it has even happened. In today’s podcast episode, I’m breaking down what commingling funds means in your business, steps you can make to stop commingling your funds, as well as how to fix your business financial statements if you realize you’ve been commingling funds in your business. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA, understanding what commingling funds means and making sure you have processes and procedures in place so that you don’t run into these issues will ensure that you are not only saving yourself time and money but your personal liability may be impacted as well if you find yourself commingling funds in your business…
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Show Notes:
Commingling funds in your business is a mistake many business owners make, whether it is intentional or unintentional. There are times when funds may be commingled accidentally and others when it is being done with no knowledge that it has even happened. In today’s podcast episode, I’m breaking down what commingling funds means in your business, steps you can make to stop commingling your funds, as well as how to fix your business financial statements if you realize you’ve been commingling funds in your business. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA, understanding what commingling funds mean and making sure you have processes and procedures in place so that you don’t run into these issues will ensure that you are not only saving yourself time and money but your personal liability may be impacted as well if you find yourself commingling funds in your business…
Welcome Back…Commingling funds is something that many business owners are doing, and they may not even know that it is happening or the consequences it may have in their business. It is a common mistake, even when business owners know they should be keeping these funds separate. Let’s start with a description of what commingling funds actually means. The definition of commingling funds is when you mix funds or assets that belong to one party with funds belonging to another. Today, we are reflecting on business funds and personal funds being commingled. When you start your business, you should always keep your business and personal funds separate. When you are an LLC or a corporation, your goal is to limit the personal liability you could potentially have if there are ever any legal issues with your business. Keeping your business and personal funds separate and not commingling them is important if you want to continue to keep that protection. If you have an LLC or a corporation and you have been commingling your funds between your business and yourself personally, you could lose the protection you get by incorporating your business. You may have heard the term “piercing the corporate veil” in the past. This is when you have commingled funds, and in turn, this could allow creditors or others to access your personal assets in case of a lawsuit.
The first step to ensure that you are not commingling funds in your business is to have separate bank accounts. This may mean that you need to open a business checking account, a business savings account, and potentially a business credit card account if you’ll also be using a credit card for your business. When you set these business accounts up, make sure that you are using them only for business purposes. Not only will having these separate business accounts save you time when you are recording your business transactions for your business bookkeeping, but if you are paying for someone to do the bookkeeping for your business, you’ll likely save some money here as well. When you are only recording your business’s transactions, the number of transactions will be much less, and most bookkeepers base their fees on the number of transactions you have in your business. If you are commingling your funds by using your business account for personal funds, you’ll have many more personal transactions to record. On the flip side, if you are using a personal bank account for your business, you’ll need to record all of the personal and business transactions so that you can adequately reconcile your bank statement at the end of each month. When you only have to record your business transactions, you’ll be saving time and money when you are doing your bookkeeping.
I often hear from clients who have not separated their business and personal accounts that they will sort everything out, but I also hear from them how long it is taking them and how they procrastinate doing it because it is not a fun task to do. They tell me about how hard it is when they do finally go back to try to remember what was a business expense and what was a personal expense. The longer you wait to do this, the harder it will get. Another question I usually get asked in this area is what is actually considered a business expense. According to the IRS, to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. Some common areas where commingling funds happen are in the travel, meals, entertainment, automobile expense, and office expense areas.
Over the years, I have found a few tips that can help you make sure you are not commingling funds. When you are making a purchase that includes both business and personal items, simply ask the cashier to run them as two separate transactions so that you can use your business account to pay for your business purchases and your personal account to pay for your personal items. Make sure that whenever you are accepting payment for your products or services in your business that these funds are going directly into your business account. Even if you need these funds personally or you are planning to use the funds personally. Create a paper trail where you deposit the revenues into your business account, and then if needed, you can transfer the funds out of the business account or write yourself a check. When you withdraw funds out of your business, you will record them as a draw. Your draw account is located in the equity section of your balance sheet, so there will be no expense listed on your income statement for the funds you are withdrawing. If you are depositing funds into your business from your personal funds, you will want to record these in your equity section as an investment, or if you are planning on paying yourself back from the business, you can set up a note payable from the business to yourself so you can track the payments being made for the money you loaned to the business. If you made a purchase for the business with your personal account, you can easily write a check to yourself for the reimbursement and include a memo with the description of where it was originally purchased. If there are any personal expenses that are incurred with your business accounts, make sure that you are recording them as a draw so that they are not impacting your income statement.
If you are commingling funds in your business, chances are your accounting and bookkeeping will be difficult for you, and your financial statements could be inaccurate. Having accurate financial statements will help you make sound business decisions. If you are not able to rely on your financial statements due to commingling of funds, you’ll not only lack confidence in how your business is doing, but if you are using this information to prepare your tax returns, they could be incorrect as well which would lead to potentially over or underpaying the correct tax amount when due. If you are using your personal account for business expenses and you don’t account for the business expenses in your business, you’ll be understating your expenses which in turn causes you to pay more taxes than you should.
If you are already commingling your business and personal funds, there is no better time than right now to fix it. Start by getting those separate business, checking, and savings accounts, and if you are using a credit card, get a separate credit card for your business as well. This will allow you to track your business funds correctly in the future. Next, you’ll want to make the time to go back and identify all the personal transactions you have recorded in your business and record them correctly. You will then do the same for any personal funds that you used for the business. This may take some time, but it will be time well spent for your business so that you can start relying on your business financial statements in the future. You can then make sure that you are setting up processes and procedures in your business so that you are not commingling funds any longer. When you do this, commingling funds is no longer a problem, and you know it won’t happen in the future since you are aware and are knowledgeable about what you need to do so that it doesn’t happen in your business. If you have questions about how to set these processes and procedures up correctly in your business, or you wonder how you can be more strategic with your business, make sure you sign up for one of my consultation sessions. These sessions are so valuable for the clients who have signed up already. My promise to you after the session is that you will understand more about your business and your personal life after the session, and you’ll walk away knowing exactly what you should be working on next to reach the success you’re striving for. You can go to www.FinancialAdventure.com and click on the work with me button. I’m looking forward to meeting with you soon and digging deeper to see where you currently are in your business and start creating actionable steps so that you can reach your vision and goals for the future, not only in your business but also in your personal life. I’m ready to work with you, see all of your successes, and watch you become a thriving business owner while creating your best work-life balance. I’ll post links to this and other valuable resources for business owners and accountants where you are listening to this podcast.
And, you know I’m going to ask…what’s at least one thing you will take away from this episode that will help your business succeed and grow your bottom line? If you need some accountability, join our PRIVATE Facebook community and post your action item, we’d love to support you.
