Can You Use a Business Bank Account for Personal Use?

A reader asks:

Recently I was hired as a bookkeeper for a small manufacturing business. My boss, the owner, uses the business bank account for personal use — and it’s driving me crazy!  He withdraws money with a debit card for personal expenses.

Last week his wife bought a big screen TV for their home using a blank check he signed from the business account. From one day to the next I never know how much money the business will have.

I’ve explained that it’s best practice to separate business and personal funds, but he tells me it doesn’t matter since the business is an LLC and he is the sole owner. Who is right? My boss? Or me? And what should I do?       

— Roxanne from New York

Why Not to Use a Business Bank Account for Personal

1. Makes it tougher to manage cash flow

When you commingle business and personal funds, the company’s cash flow situation can become confusing and more difficult to predict.

For instance, the business might not have sufficient funds when an essential business bill comes due. This could happen because the owner chooses to pay personal expenses from the business account at the same time.

Some business owners simply look at their bank balance, see a positive figure, and think they can freely spend. This mindset could swiftly lead to a cash flow crisis, disrupting the financial stability of the business.

2. Erodes personal liability protection

An owner of a corporation or limited liability company (LLC) could be held personally liable for business debts if they commingle personal and business funds.

Many owners establish LLCs or corporations precisely to limit their personal liability for business debts. However, if the owner blurs the lines between personal and business finances, this liability protection could be jeopardized.

In some cases, courts have been known to “pierce the corporate veil,” holding the owner accountable for business debts.

This risk is particularly high for one-owner LLCs and corporations, whose owners might think separation of funds doesn’t matter since they’re the sole owner.

This could backfire significantly, especially if the business shuts down, leaving business debt behind that an unpaid creditor might pursue the owner to recover.

3. Overstates or understates tax deductions

To be considered business tax deductions, expenses must be for business purposes. When personal bills are paid with a business bank account, it complicates the identification of actual business expenses.

As a result, you may miss out on legitimate deductions. Alternatively, you could mistakenly categorize personal expenses as business-related, leading to penalties and a hefty tax bill from the IRS if you’re audited.

The severity of this problem escalates when business owners neglect to keep their financial records up to date.

Too often, owners wait until tax time to categorize expenses. When that time arrives, memories have faded, and owners find themselves sifting through piles of receipts, struggling to distinguish between business and personal expenses. This scenario is ripe for costly errors.

4. Makes accounting unnecessarily complex

5. Leads to objections by other stakeholders

Having a clear distinction between personal and business finances is crucial to maintaining transparency and trust with other stakeholders.

Shareholders, investors, and business partners can quickly become concerned if they perceive that you are treating the business like your personal piggy bank.

Such behavior can raise serious questions about the integrity of the business’s financial management and erode confidence among those invested in its success.

The founder of WeWork discovered this the hard way. The high-flying company, once valued at $47 billion, filed for an IPO in the summer of 2019. The filing disclosures revealed the founder’s self-dealing, including personal loans he got from the company at below-market rates.

In other words, the founder was diverting company funds to personal purposes.

The company’s biggest investor forced him out as CEO. In the end, he had to resign from the company he founded!

WeWork is a high profile example. Remember, though, even in a small business with no plans for an initial public offering, stakeholders could sue for misappropriation of funds, fraud or breach of fiduciary duty.

So if there are other owners or investors, paying personal expenses from a business account will eventually catch up with you.

6. Could negate part of the Subchapter S benefit

Commingled accounts can throw a monkey wrench into the best Subchapter S tax plan.

A Subchapter S is an election you make with the IRS to treat taxes as a pass-through and avoid double taxation of both the corporation and the owner.

Another advantage of a Subchapter S is that it can reduce employment taxes (Medicare and Social Security taxes) for the owner.

Here is how it works. The owner becomes an employee of the company. As long as he takes a reasonable salary, the owner doesn’t have to pay employment taxes on corporate distributions over and above the salary.

However, if the owner takes non-salary distributions without keeping good track of how much he is spending, he could run afoul of the IRS.

How? By taking distributions that far outstrip his salary. Tax law requires that the owner’s salary not be unreasonably low compared to profit distributions.

What can happen is that the owner loses track of how much he is taking out of the company for personal purposes. This is easy to do when you mix personal and business expenses and don’t have good accounting controls.

As Nolo.com states, “If the IRS concludes that an S corporation owner has attempted to evade payroll taxes by disguising employee salary as corporate distributions, it can recharacterize the distributions as salary and require payment of employment taxes and penalties which can include payroll tax penalties of up to 100% plus negligence penalties.”

7. Makes it harder to profit and grow

The more disciplined a business is about finances, the greater the likelihood of success. If you are loosey-goosey handling bank accounts, it can cause your business to lack fiscal discipline in other ways. And that puts an unnecessary impediment in front of you.

Any financial reports may show an inaccurate picture of the business, because they may include personal expenses. How in the world can you generate a useful Profit and Loss statement (P&L) without clean data?

At the very least you will have to stop to clean up your data first. This robs you of real-time reporting capability.

Overall, by mixing personal and business funds and not maintaining discipline, it becomes harder to manage the business toward profits and success.

Best Practices for Business and Personal Expenses

It’s common for small businesses to start out with the owner using personal funds to jumpstart the enterprise. So, from the owner’s perspective, it might seem perfectly acceptable to continue mixing personal and business finances.

In fact, a survey revealed that 27% of business owners admitted to using the same account for both personal and business purposes.

However, commingling funds becomes problematic once the business is in full operation. Therefore, to maintain financial clarity and avoid potential issues, it is recommended to follow these eight best practices:

Separate Business and Personal Bank Accounts

A small business owner should always have two checking accounts: a personal account and a business account.

It’s so much easier when you keep your business and your personal life separate and well organized.  Read more from tax expert Barbara Weltman on why you need to separate your business finances.

• Open a Dedicated Business Account: Start with opening a separate checking account exclusively for business transactions to avoid commingling funds.
• Use Different Credit Cards: Apply for a business credit card and use it solely for business expenses to simplify tracking and reporting.
• Separate Emergency Funds: Maintain distinct emergency savings for personal and business use to ensure financial security on both fronts.
• Clear Salary Structure: Establish a clear salary or owner’s draw structure and stick to it to maintain a consistent boundary between business and personal finances.
• Regular Transfers for Personal Use: Instead of random withdrawals, set up regular transfers from the business account to your personal account for personal expenses.

Take a Salary

A small business owner should set up a consistent salary for themselves. If the business structure is a corporation or Subchapter S, the owner should become an employee. This creates a regular income stream, reinforcing the separation of business and personal funds.

For a sole proprietor, it’s helpful to establish a regular withdrawal or transfer every two weeks into a personal account.

This structured approach prevents unpredictable dipping into business accounts for personal needs. It not only promotes good fiscal discipline but also enhances financial transparency, two factors crucial for the business’s sustainable growth and longevity.

Take Profit Distributions in Lump Sums

Many sole proprietors and LLC owners often take profit distributions in addition to their salary. This practice is entirely acceptable and can provide extra financial flexibility.

However, it’s crucial to do this responsibly. Irregular withdrawals or paying personal bills randomly from business accounts can create financial chaos. Instead, distributions should be taken as planned lump sums, either once or a few times a year.

Such planned events can be built into tax and retirement planning and form part of the business’s growth strategy.

This approach helps in maintaining clarity of the business’s financial health and ensures funds are wisely used and not wasted on impulsive expenditures.

Use Separate Credit Cards

Keep Good Records for Taxes

Keep your tax records up to date throughout the year. The impact of procrastination can be costly.

Good recordkeeping helps you stay out of tax trouble. Often it isn’t bad intent that gets small business owners into hot water with the IRS and other taxing authorities. Rather, poor  bookkeeping and lack of documentation cause unnecessary problems. It’s a forced error.

Poor record keeping can also cause you to pay more in taxes.

Good tax planning becomes difficult when you don’t have a clear financial picture. So you’re likely to arrive at tax time only to discover there were strategies you could have employed to reduce taxes.

But because you didn’t have good books and the ability to look ahead before the tax year ended, you missed out.

Here are some good tips:

• Maintain Regular Bookkeeping: Update financial records consistently, including income, expenses, and bank transactions. Use accounting software for accuracy and efficiency.
• Document Receipts and Invoices: Keep all receipts and invoices organized. Digitally scanning and storing them can be helpful for easy access and reference.
• Track Business Expenses: Categorize and record all business expenses systematically to ensure accurate financial reporting and easier tax preparation.
• Regular Financial Review: Schedule monthly or quarterly reviews of financial statements to assess business health and identify areas for improvement.
• Tax Record Organization: Organize and maintain separate records for tax purposes. This includes income statements, expense reports, and tax returns.

Keep to a Budget

In business you’re more likely to thrive and be successful if you set goals and a budget.

This includes setting a budget to pay yourself a “salary.”

Don’t just pull out money from your bank account in dribs and drabs.  You will lack a clear picture of what your monthly expense burn rate is for the business. Your burn rate should be burned into your brain!

As an owner, you also need to know how many sales you have to make each month to cover your burn rate.

You are much more likely to meet your goals if you always know EXACTLY what it takes to make a profit each month. In short, you must always know:

• how much your business needs to earn, and
• how much it can spend.

Be sure to run a monthly Profit and Loss statement and other financial reports. They help you stay on track.

Always Pay Obligations Timely

Paying obligations on time is critical in business management. Neglecting to meet these financial responsibilities can raise red flags about the personal use of business funds.

All may seem well until the business starts missing payments, and then issues quickly snowball. Hence, it’s an established rule of thumb in business to pay everyone you owe on time.

This responsible practice helps evade many legal problems and fosters trust between your business and its partners or creditors. Also, it ensures the smooth operation of your business, preventing any disruption due to non-payment of critical services or supplies.

Respect Other Stakeholders

If your business involves investors, partners, shareholders, or LLC members, it is of utmost importance to handle funds with the utmost integrity. Remember that these stakeholders have a rightful interest in how business funds are used.

They need transparency and have a right to participate in decisions concerning financial matters. By keeping business and personal expenses separate and adhering to best practices, you uphold a transparent, accountable business approach.

This not only enhances stakeholder trust but also prevents the perception of inappropriate financial conduct, bolstering your business’s reputation.

In conclusion, using a business account to fulfil personal financial needs is an unwise and dangerous practice.

It’s an approach that can undermine the financial health and stability of the business and potentially lead to legal repercussions.

Be a smarter business owner. Embrace financial discipline, maintain clear boundaries between personal and business finances, and adhere to best practices to run your business successfully.

Here is a simplified comparison table to summarize the potential problems with using a business bank account for personal use, and the best practices to avoid them:

Potential Problems	Best Practices
Confusing and hard-to-manage cash flow	Maintain separate business and personal bank accounts
Loss of personal liability protection	Establish regular salary withdrawals for personal expenses
Overstating or understating tax deductions	Take profit distributions in lump sums, not sporadic withdrawals
Unnecessary complexity in accounting	Use separate credit cards for business and personal use
Stakeholder objections and loss of trust	Pay obligations on time to avoid suspicion
Legal issues due to misuse of funds	Respect all stakeholders, maintain transparency in funds handling

All answers to reader questions come from the Small Business Trends Editorial Board, with more than 50 years of combined business experience. If you would like to submit a question, please submit it here.

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