A Common Practice that May Needlessly Over-Complicate
What Is "Commingling?"
It is relatively common for self-employed persons or small-business owners freely intermingle or commingle business and personal income and expenses. A person operating a one-man, "handyman" service type of business, for example, may have personal checking and savings accounts separate from business checking or other business operating accounts---or not. He or she may fill up the gas tank on a company car or a personal vehicle from the business account ... He or she may swing by the grocery store on the way home and pick up dinner using the debit card attached to the business account. Is there anything wrong with this?
Paying Personal Expenses from a Business Bank Account: The Pitfalls
The primary problem with "commingling" business and personal accounts is that it makes it difficult not only for you but for an outside auditor of any sort to accurately determine what your actual business expenditures and your actual personal income is. Who would care to know these things other than yourself? By muddying the line between personal and business expenses, you make it difficult for the Internal Revenue Service, for one, to determine whether your filed tax returns are accurate and honest should the agency conduct an audit of your returns. Although The Hilla Law Firm, PLLC does not engage in tax practice, all business expenses deducted must generally be properly documented. Failure to do so may result in either an over-payment or an under-payment of your business and/or personal tax obligations. A Chapter 7 or Chapter 13 bankruptcy Trustee (or the Office of the US Trustee, the division of the US Department of Justice that oversees the bankruptcy process in the United States) will also be keenly interested in the bright line between personal and business expenses. A lack of clarity concerning these things can adversely affect your income-based eligibility for a Chapter 7 bankruptcy or the required length of a Chapter 13 bankruptcy payment plan and the amount of your monthly Chapter 13 plan payment. Your bankruptcy attorney will be required upon the filing of either a Chapter 7 or Chapter 13 bankruptcy to provide documentation of your actual income to the Chapter 7 or Chapter 13 Trustee assigned to administrate your case by the Bankruptcy Court, and to the US Trustee's Office upon demand. Commingling of business and personal income and expenses can frustrate your own attorney's need to prove to the Powers That Be in the bankruptcy process that yours is a "good faith" filing that you are completely eligible for. Outside of bankruptcy, if you are sued personally for the actions of your business, or in a variety of other circumstances, commingling of personal and business income and expenses can further erode "the corporate veil" that protects you (depending on the type of business entity you may be operating with) from personal liability for the business' actions or inactions. If an aggressive adversary can prove that there is not a great deal of "breathing room" between your corporation and yourself---that the corporation is a mere shell for your personal activities---they may be able to successfully pursue your personal assets for harms alleged done by the business.
Paying Personal Expenses from a Business Bank Account: The Importance of a Good Paper-Trail
How do you avoid these difficulties? If you insist on doing business in this rather informal manner, at least keep a good paper trail for auditors or Trustees to follow when the need arises. Does anyone truly ever know that they will never need to file for bankruptcy? Structure your business operations and your bookkeeping as if this, at least, is an inevitable possibility. Not commingling at all and simply and religiously maintaining separate bank accounts for business and personal uses is even a better option, even though it may present some level of day-to-day annoyance for you.
Personal Expenses & Business Bank Accounts: The Bottom Line
The bottom line with regard to paying personal expenses from a business bank account is that there is nothing specifically wrong with it---but the fact that you've done business that way may make sorting through the difference between a "personal" and "business" expense when a humorless IRS auditor or Chapter 7 bankruptcy Trustee is breathing down your neck all the more burdensome. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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