A common practice I often see among small businesses is the mixing of personal and business expenses. This is where a business owner uses funds from his business account to make personal purchases, or vice versa, though the opposite is rare. Not only is this a bad business practice, but the IRS strongly forbids it. By using business funds for personal needs, the actual profitability of a business cannot be accurately measured. Hence, the necessary and imminent operating decisions for the business are not attainable. How then can funds be legally moved from the business to an owner’s personal account? How can this erroneous business practice be stopped? In this blog, we will answer both questions. First, how to legally move funds around.
Moving Funds From The Business To A Personal Account
For sole proprietors, LLC owners, and S Corp owners, the best way to avoid mixing business and personal funds is to make necessary withdrawals as needed, either by ACH, direct bank withdrawals, or a check written on a business check. The withdrawals should be recorded on the business books as a withdrawal through the owners/partners’ “Distributions” or “Withdrawal” account that is housed in the Equity section of the balance sheet. Avoid using business credit or bank cards to make purchases or pay bills that are of a personal nature.
How To Stop Using Business Funds For Personal Expenditures
The best way to stop using business funds for personal expenditures is by denying business software access to personal bank and credit card accounts. An often-repeated practice I have seen is where a personal credit card is synced in the business’s QuickBooks account. Remember, the business must have its own credit cards and bank cards, and only they should be synced in QuickBooks. This recommendation goes beyond the QuickBooks accounting software. For example, if you use the same insurance company to cover your business vehicle and your personal vehicle, request that each be set up separately and provide separate bank account details for payment. Repeat this setup for all other “shared” service providers.
You may encounter an issue where the payment can only be set up for one account, such as utilities, in the case where the business is run from one’s home. In this instance, be consistent and either set up the payment method using a business account or a personal account, preferably the former. Then, when a transaction flows through, be sure to split it between the business expense account and the owner/partner’s distribution account. Coming up with a split may require the help of your accountant. Be sure to inform your tax accountant of the split between business and personal expenses so that she makes the correct tax treatment when filing the business’s Schedule C, Form 1120, or Form 1065 annual tax return.
If you need assistance properly managing your business expenses, reach out to your accountant. If you do not have an accountant, we are happy to assist. Please contact our office and refer to this blog. Remember, the best operating decisions for your business are made when your financial books are accurate.
DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.
