There is one sure-fire way to screw-up your business and put it into disaster mode. It’s a trap that some new entrepreneurs fall into easily, and then discover that it’s very difficult to get out of.
You want to know what it is?
Plain and simple, it’s commingling your money – so what is that, you ask?
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I’ve written about 6 lessons I wish I had know known before starting my business in the past – but this is not one of those lessons. I’ve never been a ‘commingler’ and I don’t want you to be either!
When you open a business and you decide to put all of your business money into your personal bank account instead of opening a business account, you are commingling.
Commingling also happens when you:
• Move money between business and personal accounts without proper documentation.
• Use a business credit card or write a check from your business account for personal expenses, and vice versa.
• Deposit business checks into your personal bank account instead of your business account.
• Make withdrawals from your business account to pay personal expenses without proper documentation.
The problem with commingling is you have a financial responsibility to reconcile your money at the end of every month in your business. When you mix your business transactions with your personal transactions, it becomes difficult to discern which things are personal and which are business. You need to know what revenue is really yours to keep, and what revenue really belongs to the business.Are you wondering what commingling is and why it should be avoid by #entrepreneurs no matter what? Click To Tweet
Come tax time, you’ll need to report on your business revenue and expenses, and decide how much tax you need to pay. It can be incredibly difficult to remember if an expense was personal or business when you go back to it 12 months later and you’re trying to determine how much to claim on your income tax.
When you mix everything together, you muddy the waters and make it really hard for your accountant – or more importantly, for you – to know how your business is doing.
I’m not a lawyer, but I know that there can also be legal ramifications for commingling. In business law, there is a concept called the “corporate veil,” which is basically the separation between the business owner and the business. Commingling your business and personal funds puts you at risk – creditors can “pierce the corporate veil,” and tap into your personal assets for your business liabilities.
If you’re getting ready to start your business make sure to plan for this process of keeping your finances separate. You can (and should!) pay yourself every month, but start out on the right foot with business and personal accounts separated. Your accountant will thank you at tax time!
If your business is already up and running and you’ve got all of your money mixed together, the first thing you need to do after reading this blog is to go open a bank account specifically for your business. You’ll also want to get a credit card specifically for your business. You may need to engage the help of your accountant to get it all sorted out, but the sooner you clean things up and get your finances separated, the happier you (and your accountant) will be. If you’ve started off with your finances commingled you might also benefit for the Pilot To Profit Success System – it covers some of the critical business fundamentals you need to put into practice in order to help your business take flight and keep soaring higher.Start your #business on the right foot - don't commingle your money! Click To Tweet
Remember, this is not about not taking money out of your business. I want you to pay yourself, but what I don’t want you to do is to mix your grocery bill in with your office supply bill. You won’t have a firm grasp on how much money you really have in your business or how much profit you really have in your business, because it’s all mixed in together.
Leave me a comment below and let me know if you had a separate bank account when you started out. If you didn’t, how did you go about fixing it and cleaning it up, and how did you feel after you did that? Your experience may help a new entrepreneur from heading down the same path.