As a business owner is it ok to mix personal funds and business funds? It is easy to do and not a great habit. When you are a new business doing business as a DBA, you might just use one set of books to track personal and business income and expenses. We all do it since in the end; the money will end up in the right places. However, from an accounting point of view, this can be a confusing strategy and not easy for you to track or for your CPA to follow.
As your business grows and you are making more money, you will find it necessary to transition into a Corporation or LLC and at this time, running your funds together can lead to legal consequences if an issue arises with a client. When your funds are mixed in this situation, there is no clear line between you as an individual and you as a business owner. In this situation, your personal assets may be included as business assets and vice versa in any lawsuit since you will have “pierced the corporate veil”.
To protect yourself, it is a good idea to separate your business from you personally. Keep the accounting records separate. If you are using QuickBooks, you should have a personal file and a separate business file. All business income should be deposited to the business account and not to your personal account. Setting yourself up on Payroll will help to track personal money, give you an income and a tax advantage at the end of the year since you will have already paid some tax through payroll.
Do not pay personal expenses from any business account and do not pay business expenses from any personal account. Designate at least one checking and savings account and at least one credit card for business expenses only. And then do the same for your personal accounts. This will help to keep your records straight and help your business develop a legitimate credit rating.
When you run into an issue where you need to personally pay for something and you have already spent your “paycheck” you can then give yourself a Distribution from your business. You will pay income tax on this which is separate from your payroll tax. This will happen from time to time and this is a legitimate way to record extra income outside of payroll.
How about if your business account is low on funds and you have an expense that needs to be paid? You can “loan” yourself money to be paid back at a later date. Just record this as a loan in your records.
It’s as easy as that but takes a little focus and attention. If you are currently mixing funds, start the separation now. I wouldn’t worry about going back through the whole year and re-categorizing everything, just start today and going forward you will be on the right track. If you need help and aren’t sure where to start, a bookkeeper can get you started.
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