Strategies to Avoid Commingling

When it comes to the financial transactions in our business, we want to make sure that we keep them organized and separate from our personal transactions (and from those of other businesses we might have).

What is commingling?

The official term for mixing personal and business transactions (or multiple businesses) is commingling, and it’s a huge no-no in the business world. The reason is that when we combine finances into one big pot, it becomes really tough to get a clear picture of what revenue and expenses belongs with which entity. Commingling can also have huge legal implications depending on your business structure.

Today we’ll review those implications and share strategies to help you avoid commingling in the future.

Let’s break it down by business entities.

How commingling affects sole proprietorships

If you’re a sole proprietorship, commingling affects you to the extent that you aren’t able to see at a glance the revenues and expenses that relate to the business. You may receive personal funds in the same way that you receive business funds—cash, check, PayPal, or the dreaded options of Venmo, Cash App, or Zelle. All of these transactions may live in the same bank accounts. And you’ll use that same bank account’s debit card to pay for expenses you need for your personal life, as well as the business.

How commingling affects limited liability companies (LLCs)

If you’re a limited liability company, or LLC, commingling can not only prevent you from accurately reviewing revenues and expenses, but it can also have legal implications. The LLC protects your personal assets from risk in the event you are sued, and have judgments or liens placed against your business. If you, as the owner, commingle your personal assets with the business’, not only do you place those assets at risk but you also put your entire business at risk for being disregarded as an entity apart from you. That means, anything you own becomes fair game as a means of settling judgments and liens. And wasn’t forming an LLC your insurance against that happening? So don’t undo your careful planning by commingling.

So, what’s the strategy to avoid commingling?

1. Open separate bank accounts.

You need both a checking account and a savings account to start. With the checking account, you should be issued a debit card which can be used to make all purchases.

2. Determine how you’ll be paid for your services and/or product sales.

You may have heard of well-known payment processors such as Stripe and Square. These services allow you to send invoices and issue receipts, which further add credibility to your business transactions when it’s time to file with the IRS.

Is PayPal an acceptable option?

The short answer is ‘yes,’ it can be. As long as you aren’t using PayPal to skirt merchant processing fees and are properly accepting or making payments “for goods or services” instead of “friends and family,” you shouldn’t encounter an issue from PayPal.

Tip: When receiving payments via PayPal, make sure to transfer them out to your bank account immediately instead of holding them in your PayPal bank account.

What about paying for expenses via PayPal?

Of course you can. If you prefer using PayPal to pay invoices, make sure to link your business debit card to your PayPal account and select that debit card as the funding source when making payments. You do NOT want to use the balance in PayPal to make payments. Why? Because those transactions never make it to your bookkeeping system!

Why are Venmo, Cash App, and Zelle not approved methods of payment?

Because their terms and conditions say so! These apps are meant for personal transfers only and offer no merchant or consumer protections. Protect yourself and your customers by not using these payment methods.

3. It all comes down to being disciplined.

Make sure that you only accept payments and make purchases using your business accounts. With practice, this will become a habit and second nature. You might be wondering…

How do I take money out of my business as the owner?

I’m so glad you asked! To take money out of your business, make an online transfer from your business bank account to your personal bank account OR write yourself a check from the business. Both are labeled as an Owner’s Draw.

What happens when I put a business expense on my personal credit card? Can I still deduct it on my taxes?

You sure can. Similarly to how we label transfers to your personal bank account as Owner’s Draws, any purchases you make on behalf of the business OR money you deposit into your business are labeled as Owner’s Investments.

In all, it takes a bit of initial effort to set up your systems and nail your process so that you don’t fall into commingling by default. But once you have it all set up, it’ll be a breeze to maintain and you’ll be so glad you did.

We hope this gives you a better understanding of how to avoid commingling.

All the best,
The Creative’s CFO Team


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