Here’s a scenario for you: You’re the sole owner of a corporation and have no employees.
Every once in a while you find yourself a bit short, so you let the company pay for some of your personal expenses, such as dry cleaning, spa treatments and house cleaning services. You’re not depriving a business partner or any employees of a salary so, in essence, it’s your money to do with as you like. Right?
Wrong. Here business lawyer Nina Kaufman explains –
Because your business is a separate entity, you need to think of it as if it were another person entirely. For example, you wouldn’t just walk into the florist shop next door and take money out of its cash register for your manicures, would you? No (at least I hope not). And you wouldn’t just poke your nose into your friend’s handbag to take money out of her wallet–you’d ask for permission. Likewise, for tax and legal reasons, you need to “ask” your corporation for permission to take funds for your personal use.
How do you do this? By writing a check to yourself from the business account for your salary (or draw), depositing the check into your personal account, and using the funds from there.
Having the company pay directly for your personal expenses can get you into a world of trouble. If your corporation or LLC is sued by creditors for nonpayment, it could be found that you “stripped” the corporation of the money needed to meet these obligations by using corporate money for your personal expenses. As a result, a court might consider your corporation a “sham.” A court then could ignore the limited liability protection your corporation is supposed to provide and pierce it (known in legal terms as “piercing the corporate veil”) to reach your personal assets for repaying the creditors. Another grave danger is when business owners use one checking account for both business and personal expenses. This becomes known as “commingling funds”–also a no-no, and also grounds for disregarding the personal asset protection that a corporation can provide.
Even for businesses operating as sole proprietorships, where your personal assets are at risk anyway, it’s a far better practice to open a separate bank account for your business activities. Face it: It really doesn’t take that long to write yourself a check to deposit into your personal account. Plus, you’ll receive two important benefits:
You’ll start to develop the kind of business mindset your company needs in order to grow and
You’ll save a great deal on accounting fees, because the separation between business and personal (and what’s legitimately tax-deductible) will be that much clearer.