A lot of small business owners understand the importance of establishing their business as a corporation, an S corporation or an LLC. One of the main reasons for doing this is asset protection–keeping their business and personal assets far apart and staying away from creditors. What generally happens after the new entity is formed is that business transactions are mixed with personal ones. Let’s take a look at some of the pitfalls and what you can do to avoid them.
Paying Personal Expenses Out of The Business – We know how it is. You are working 14-hour days or even more. There is never enough time to do what you need to do. You are now picking up the dry cleaning on your way home from work and realize you do not have cash or your personal credit card so you pay using the business card. Maybe you do this because you think you can sneak this one by your CPA! Danger–you have committed a couple of mistakes! Because you are now commingling personal and business transactions, the IRS will most likely look at all of your personal and business accounts because they cannot determine that you have kept everything separate. Your problems are worse if they see you are trying to deduct personal items. This also applies to creditors of the business and potentially exposes your personal assets to creditors of the business. This is exactly what you did NOT want when you formed your business entity!
Including Business and Personal Accounts In Your Accounting Program – Another very common mistake made by business owners trying to save money by doing their books themselves or who turn their books over to inexperienced bookkeepers. In this case, their accounting program file contains both bank accounts and credit card accounts used for both business and personal purposes. Often, the business owner believes everything is okay because they have “separated” the accounts.
The truth is that when creditors and the IRS obtain your accounting file and see both business and personal accounts included, you have lost the asset protection of your business entity.
What Should I Do?
- Change how you are thinking. Ask yourself a question–if you were working for someone else, would they reimburse you for that dry cleaning bill you are now paying? Would they approve if you used their corporate card? Of course not.
- Find ways to not do what you know is wrong. Look at a picture of your spouse and family before making that online purchase.
- Make sure your books are set up correctly. If you did it yourself or you used Budget Bookkeepers, then it probably is not. You will need to hire someone to fix your bookkeeping mess, and this will cost a lot more than hiring someone to set it up right the first time.