Most business owners understand the importance of being a corporation, whether it’s an LLC, S-Corp, or C-Corp. Forming a corporation makes your business a separate legal entity – separate from you the individual owner or individual partner or individual shareholder. This is always wise to do. It protects you individually, and your personal assets (personal bank accounts, house, car, etc.). I advise all clients to consult a business attorney to form a corporation.
What many business owners don’t know about is the necessity of making your financial transactions reflect the two separate entities. You want to limit personal transactions to your personal accounts (checking, credit cards, loans, etc.). Likewise, you want to limit business transactions to your business accounts. This means you will need to have separate bank and credit card accounts for business and personal activity.
The reason for this is that if you “co-mingle” funds between your business and personal account, you are at risk of losing the corporate protection you established with formation of the corporation. Co-mingling funds means that you are regularly paying for personal transactions from your business account or vice versa. It can also mean that you are depositing business income into your personal account. It’s OK to pay yourself salary, draw, or distribution, but that is all you want to do.
The rationale used to disregard your corporate status is that since you aren’t keeping the two entities (the business and yourself) separate in your books, you’re not acting as if the business is a separate legal entity. Because you’re not acting like the business and yourself are two separate entities, they can argue that there is no distinction between your personal and business assets. This can be a rude awakening if somebody is suing your business, and they end up being able to go after your personal funds, too. Or if somebody is suing your personally, and they end up being able to go after your business assets. So please keep your funds separate to protect them.
Here’s a list of a few things I’ve seen:
- Paying your home’s mortgage directly from your business account. What you should do instead is take a draw, distribution, or salary (ie pay yourself), then pay your mortgage from your personal funds.
- Use a business Amazon account to take advantage of the Prime membership with that account for personal transactions. What you should do instead is to have separate Amazon accounts for business and personal transactions.
- Using a personal credit card for business transactions because you haven’t taken time to apply for a business card. You should take time to apply for and use the business card.
- Not having separate checking accounts and running all transactions through your personal account.
- Having business income deposited to a personal account.
- Regularly paying for personal transactions with a business card. We all occasionally pull the wrong card out of our wallet. But repeatedly making this mistake is detrimental.
Even though you may think of it as all your cash (or pigs), it’s important to keep it in two separate buckets (or pens).