Matters Column

Best practices for separating business and personal finances

June 19, 2015
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In family-owned businesses, the line dividing your business and your personal life is already blurred.

For many generational family businesses, the lines are more blurred today than ever before, as technology keeps us connected and “on the job” even when we’re on vacation.

But while you may find yourself working 24-7, it’s still important to keep your business and personal financial lives separate.

Limit your liability. The primary reason most family business owners take the time and expense to form corporations or LLCs is to shield their personal assets from liability if their company is sued and a monetary judgment results.

While your creditors can come after the assets of your corporation or LLC in that circumstance, your personal assets — such as your home and household bank accounts — are legally off-limits.

In contrast, sole proprietors have no limit on their personal liability in the event their companies are successfully sued — or if they have creditors lined up after a bankruptcy. This is why entrepreneurs are usually advised to operate as LLCs or incorporate.

Take separation seriously. Even if you’ve formed a limited liability entity, such as an LLC or S-Corp, there is a way for your creditors — including the IRS — to come after you personally.

They can try to prove in court that your corporation does not actually operate as a separate financial entity. In legal lingo, this strategy is called “piercing the corporate veil,” and if it’s successful, it can be disastrous for small business owners, who could end up paying out large judgments from personal accounts.

Segregating your company’s assets and financial dealings from your family’s is the primary weapon against a creditor trying to pierce the corporate veil of your business.

For instance, you should open a separate bank account under your company’s name, rather than using your personal checking or savings account to pay for company expenses and take company deposits. While it is more expensive and time-consuming to operate this way, it’s also much easier and cheaper for tax purposes.

Resist the co-mingling temptation. It is common for business owners and family members to use their personal credit cards to pay for business expenses. Being aware of this tendency can help you avoid it. Almost half of small business owners did this occasionally, according to a 2012 survey by the National Federation of Independent Businesses.

Establishing credit under your company name is smart, and using a separate credit card for all your business expenses provides an easy way to tally up totals at tax time. Look for a business credit card that offers competitive interest rates or perks like rewards and discounts, extended warranty coverage, insurance and travel assistance services. 

Record everything. If you do commingle charges on your credit cards, be sure to pay the balance on the business card from your business account and then write a check reimbursing the company for the personal expenses you racked up, and vice versa. Keep meticulous records showing those repayments, and do so in consultation with your accountant.

And remember, there are definite risks that go along with this practice that should be taken into account. In the long run, it may be easier — and cheaper — to sign up for a personal credit card with generous reward points and use those for the family vacation.

Karen Prindle is a senior wealth planner for Fifth Third Bank Western Michigan. Fifth Third does not provide legal or tax advice. This information is provided for educational purposes only and is subject to change. 

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