Are you one of those small business owners who think their personal finances have no bearing on their business? Think again.
Imagine this: a lucrative investment opportunity comes along, promising to take your business to the next level. The investor is impressed with your idea, but when they request your financial records, there’s a problem you never thought you’d be facing.
You’ve been mixing personal and business finances for ages, and your financial records are a jumbled mess. From dining out to office supplies, your financials are a mix of everything—and potential investors can’t differentiate your earnings from your everyday spending. As a result, they walk away, taking the opportunity with them.
This may look like a hypothetical scenario, but it’s a reality for countless small business owners who inadvertently let commingling funds block their path to growth.
Fortunately, there’s an easy fix: personal bookkeeping. By clearly separating your personal and business finances, you can create a financial system that avoids chaos and builds the trust and transparency your business needs to thrive.
This blog explores the risks of commingling funds, how personal bookkeeping prevents them, why it’s vital for small business owners, and steps to implement it effectively.
Commingling funds: blurring the lines by mixing personal and business finances
Commingling funds happens when you mix personal and business finances. Think of it as mixing your business’s assets and profits with your household budget—you lose track of where the money comes from and where it’s going, making it impossible to assess your business’s true financial health.
Using your business credit card to pay for groceries or your personal bank account to cover office supplies are common signs of commingling. Over time, this blurring of lines makes it harder to track your business’s actual performance, manage taxes, and maintain financial clarity.
Why do business owners mix finances?
Many small business owners juggle multiple roles in the beginning—founder, marketer, customer service, and sometimes even accountant. In the chaos of building a business and DIY bookkeeping, it’s easy to blur the lines between personal and business expenses.
At first, it might seem easier to use one account for everything. For instance, paying for business-related software[1] subscriptions with your personal account because it’s more convenient, only to realize later that it’s hard to track those expenses separately when preparing financial statements.
Cash flow pressure is another major factor in commingling funds.
Infact…
Did you know?
38% of small business owners turn to their personal savings to fund operations when the cash flow runs low[2].
When cash is tight, business owners may borrow from personal funds or use business money for personal expenses, like paying rent from the business account or covering a business bill with a personal credit card.
Lastly, many business owners underestimate the risks of commingling funds, such as complications during tax season or when applying for a loan. Recognizing these risks helps business owners take the necessary steps to keep their finances separate and their businesses on track.
The risks and realities of commingling funds
Legal repercussions
When you set up a business entity, such as an LLC or corporation, the law views your business as a separate “person” from you. In such cases, your business becomes a shield protecting you from personal liability. This means your personal assets (like your house, savings, or car) are protected if your business faces a lawsuit or debt collection.
However, if you commingle funds, that legal separation—known as the corporate veil—can be questioned. Courts may decide you aren’t treating your business as a separate entity and “pierce the corporate veil.” Once that veil is pierced, creditors or lawsuits can come after your personal assets.
In a similar Iowa court case, a business owner faced personal liability after failing to maintain clear boundaries between[3] his personal and business finances.
His company, specializing in biosolids management, abandoned a project, leading to a $410,067 judgment against the corporation for breach of contract. Unable to collect, the plaintiff sought to pierce the corporate veil and hold the owner personally liable.
The court found that while the owner had a separate business account, he frequently commingled funds between his personal and business finances and failed to maintain proper corporate records or follow formalities like keeping bylaws or holding shareholder meetings.
These actions blurred the lines between the owner and his corporation, ultimately leading the court to hold him personally accountable.
Missed loan opportunities
Did you know?
16% of small businesses secure funding through bank loans[4].
But here’s the catch: banks and lenders scrutinize your financial records closely. If your personal and business finances are mixed, it raises red flags about your management practices, significantly reducing your chances of loan approval.
Clear, organized finances are not just a good habit—they’re your ticket to gaining the trust of lenders and securing the funds your business needs to grow.
Tax penalties and audits
Commingling funds don’t just blur financial lines—they can also trigger severe tax penalties and audit risks.
In United States v. Gorrell (2019)[5], a business owner was found guilty of tax evasion, partly due to commingling funds. The owner paid personal expenses using business and investor funds and made unrecorded cash withdrawals. The court ruled these actions as deliberate attempts to evade taxes under federal law.
This case underscores how mingling personal and business finances can flag suspicious activity for the IRS, potentially leading to audits, penalties, and even criminal charges. Keeping clear financial boundaries is critical to avoid such costly consequences.
Company valuation
When personal and business funds are intermingled, company valuation can take a significant hit because financial disorganization signals poor management practices. This can make your business appear risky to stakeholders.
Moreover, mixing personal and business finances inflates costs or distorts revenue figures. This misrepresentation can mislead valuation metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). These issues can lower your company’s market value and even disrupt your exit strategy.
If you plan to sell your business or transition ownership, potential buyers will carefully examine your financial records. Commingled accounts make it difficult to present a clear picture of the company’s true profitability and operational efficiency, raising doubts about its actual value.
Also read: How to ensure a smooth and successful business exit
Business bookkeeping vs personal bookkeeping: understanding the differences
| Business bookkeeping | Personal bookkeeping | |
| Purpose | Focuses on tracking income, expenses, profits, liabilities, and assets related to business operations. | Primarily concerned with managing personal income, household expenses, savings, investments, and budgeting. |
| Scope | Provides financial clarity for business growth, tax filing, and compliance with regulations. | Ensures personal financial health, supports goal setting, and helps in managing debt. |
| Financial goals | Aims to maintain profitability, prepare for business expansion, and secure loans or investors. | Helps individuals manage their day-to-day finances, plan for personal goals like home purchases, vacations, or retirement, and ensure financial stability. |
| Tools and Systems | Often uses more advanced tools such as accounting software (e.g., QuickBooks, Xero) to track complex transactions, inventory, payroll, and business-specific reports. | Typically involves simpler tools like personal finance apps (e.g., Mint) or spreadsheets to track monthly expenses, savings, and budgeting. |
| Need for professional help | Hiring a professional accounting or bookkeeping service helps ensure accurate records, identify tax-saving opportunities, and keep your business compliant. | Personal bookkeeping can usually be managed independently with the help of budgeting tools and apps. |
Also read: 5 best personal bookkeeping apps for business small owners
How personal bookkeeping helps avoid commingling
1. Establishes clear financial boundaries
Personal bookkeeping and budgeting help define where your personal finances end and your business finances begin. By tracking personal income and expenses, you create a clear separation that reduces the likelihood of accidentally mixing personal and business finances.
2. Organizes financial management
When personal bookkeeping is in place, organizing and managing your finances becomes more straightforward, reducing confusion and commingling of funds.
3. Protects personal assets
By maintaining distinct financial records, personal bookkeeping helps safeguard your personal savings, investments, and other assets from being tied to business liabilities. If your business encounters financial trouble, this clear separation keeps your personal finances secure.
4. Encourages financial discipline and accountability
Did you know?
Only 28% of American households have a written financial plan to guide their finances[6].
This means more than half the households in the USA don’t have the discipline to keep their finances in order. Fortunately, this is where personal bookkeeping comes to save the day.
Keeping track of personal finances alongside business bookkeeping promotes accountability and instills financial discipline. This habit not only prevents commingling but also improves overall financial management, benefiting both your personal life and your business operations.
5. Provides clarity and structure
Personal bookkeeping acts as the first line of defense against commingling funds. It provides the clarity, structure, and discipline needed to keep personal and business finances separate, ensuring both areas remain organized and compliant.
How to correct the intermingling of funds and get your finances back on track
1. Review previous transactions
Go through your bank and credit card statements. Label each transaction as either personal or business and move any misclassified expenses to the correct category. For example, if a personal dinner was paid from a business account, mark it and note the correction.
Once sorted, you can also establish a bookkeeping system to keep this separation consistent moving forward.
Also read: How to build a reliable bookkeeping system from scratch
2. Separate personal and business bank accounts
If you are still using one account for both, it is time to cut the cord and open a dedicated business account [7]now. Transfer a reasonable starting amount to cover business expenses, and ensure all future transactions are routed through the correct accounts.
3. Use AI-powered tools
Did you know?
Small businesses that incorporate artificial intelligence are 12% more likely to grow their profits[8].
If you also want to grow your profits and avoid commingling of funds, you must adopt tools like QuickBooks[9] or Xero[10] to automate the process. These platforms use AI to categorize transactions and generate reports, saving time and reducing errors.
4. Set a fixed salary for yourself
Establish a consistent salary or owner’s draw from your business. This ensures you’re not dipping into business funds sporadically for personal needs. For example, transfer a set amount monthly from your business to your personal account, just like you would for an employee’s paycheck.
5. Reimburse immediately
Mistakes happen—if you use personal funds for business expenses or vice versa, reimburse the correct account immediately. For instance, if you buy office supplies personally, write a reimbursement check from your business account and document the adjustment.
6. Hire a professional
If your finances are too tangled and DIY bookkeeping feels overwhelming, don’t hesitate to seek help from a professional bookkeeper.
The bottom line
Mixing personal and business finances can expose your business to a range of risks, including tax complications, challenges in securing loans, legal issues, and harm to your business’s reputation. It also increases the chance of creditors targeting your personal assets and can hinder your growth potential.
The solution is simple: personal bookkeeping keeps your finances in order, while business bookkeeping helps you track every dollar flowing into and out of your business. But if you’re unsure where to start, hiring a professional is a great first step that can take the burden off your hands and ensure your finances are well taken care of.
At CoCountant, we provide bookkeeping services to small business owners like you, handling everything from daily transactions to big-picture financials. We specialize in all aspects of bookkeeping, from recording every transaction to keeping your financials current. With real-time cash flow reports and bank account reconciliation, we ensure you have an accurate, up-to-date picture of your finances.
Our dedicated bookkeeper, assigned to meet your specific needs, ensures that every invoice and bill is accurately tracked and matched in your records, preventing the commingling of funds and strengthening the distinction between your personal and business accounts.
FAQs
How much does a personal bookkeeper cost?
The cost of hiring a personal bookkeeper varies based on factors like experience, location, and the complexity of services required. Entry-level bookkeepers typically charge around $11 to $25 per hour. On the other hand, the rates for experienced bookkeepers can go up to $80 per hour, depending on their skills and expertise.
How to do personal bookkeeping?
- Create a method for tracking your income, expenses, and savings. You can use a simple spreadsheet, a personal finance app, or accounting software like Mint or YNAB (You Need a Budget).
- Record all sources of income.
- Break down your expenses into categories (e.g., rent, utilities, groceries, entertainment).
- Based on your income and expenses, set a realistic budget.
- Review your finances monthly to ensure you are staying within your budget and saving enough for future goals.
What is the best bookkeeping software for small businesses?
- Quickbooks: Ideal for businesses of all sizes, offering invoicing, payroll, tax calculation, and detailed reporting with seamless integrations.
- Xero: Perfect for small to medium businesses, with features like bank reconciliation, invoicing, and multi-currency support, plus strong integration capabilities.
- FreshBooks: Best for service-based businesses and freelancers, focusing on invoicing, time tracking, and expense management, with an intuitive interface.
Is personal bookkeeping necessary for small business owners?
Yes, personal bookkeeping is essential for small business owners to keep personal and business finances separate, ensure tax compliance, and maintain a clear financial picture for both personal and business growth. It helps avoid the risks of commingling funds and supports better financial decision-making.
