Common Small-Business Tax Snafus – Keeping Things Separate
The most common piece of advice given to (and ignored by) new small- business owners is to keep everything that’s personal completely separate from the business right from the very start. In addition to making your book- keeping job a heck of a lot easier, it can also help you avoid some potential legal and ﬁnancial pitfalls. While it may seem like a convenience to use your personal credit card to pick up ofﬁce supplies, that momentary convenience can end up costing you both time and money.
The legal issues can be the most troubling. When you’ve gone through all the trouble of forming your company as one of the liability limiting entities (corporation, LLC, or LLP), you don’t want to lose that personal ﬁnancial protection due to carelessness. Using the company checkbook interchange- ably with your own can result in the loss of your limited liability protection.
For that reason, it’s critical to keep your personal ﬁnances completely separate from your business ﬁnances except for bona ﬁde loans, owner withdrawals, and salaries. In some cases, mixing funds can end up costing you money. For example, if you use your corporate checkbook to pay a personal bill, that counts as paying yourself a dividend. If your corporation is a C corporation, that dividend will increase your personal income tax bill. Similarly, if you pay corporate expenses with personal checks, you’ve just made a capital contribution; the only way to get that money back is to pay yourself a dividend.
Finally, from a sheer accounting perspective, mixing funds is just plain confusing when it’s time to record journal entries. Instead of having one set of documents to comb through for transactions, you have at least two: yours and the company’s. That’s double the work, and it often takes more than double the time to sort everything out. To avoid the extra work, the extra taxes, and the potential to lose your limited liability protection, make sure to keep your personal ﬁnances personal and completely separate from your business ﬁnances.