You are subject to limited liability protection when you register your business as a corporation. This means that if a person were to sue your business for wrongdoing, your personal assets would not be at risk.
This protection is vital to all business owners as a company can be subject to litigation for accidents, defective products, misinformation, or more. However, let’s discuss a common practice that occurs that removes this liability protection from you. It’s called co-mingling of funds.
What Is Co-Mingling of Funds?
When the finances of a business are used interchangeably with the owner’s personal expenses, that is called co-mingling of funds. For example, if you own a business and use the corporate credit card to grab a few groceries, get a pedicure, and pay for your child’s preschool, that is called co-mingling.
You should always use the business bank account for business expenses. If you have personal needs, you switch to your personal debit card when making those purchases.
Why Is Co-Mingling a Problem?
If you show a history of co-mingling, your limited liability protection is removed. Your records will show co-mingling, which will hold you vulnerable to litigation and even fraud or embezzlement charges.
Your disregard for the business as a separate entity will show through in your co-mingling transactions. Therefore, there will be a reason to believe you are not trustworthy in spending business funds.
Common Examples of Co-Mingling of Funds
While many people think of their business as their babies, they must keep the financials completely separate. Look at some of these examples of co-mingling and put restrictions in place to ensure this isn’t happening in your business:
- Depositing business checks into your personal account
- Paying a contractor with personal money
- Not opening up a business bank account
- Transferring money between a personal account and a business account without a reason
- Purchasing significant items through the business that are unrelated to the business
Start your business off right by opening a company account and keeping finances separated.
Do you have questions regarding co-mingling of funds? If your personal and business finances are getting a little murky, Shoup Legal is here to help. Protect yourself by definitively separating your personal assets and bills from your business expenses. Give us a call at (951) 445-4114 or email at [email protected] to understand how to rectify your business’s financial situation.