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Sunday, September 9, 2012

Beware Of Commingling Funds

The practice of commingling funds is a dangerous one and I strongly advise business owners to avoid it at all costs.  When a business owner commingles funds it means that income and expenses are mixed together, either between business and personal accounts or from one business account to another.

I know that many of you would never even consider doing something like this, but I can promise you that it happens all too frequently.  Unfortunately, far too many business owners don't think it's a big deal and therefore do it without giving it so much as a second thought.  The problem with this behavior is that the separation that a legal entity is supposed to provide can be completely washed away due to commingling.

The primary reason that people utilize LLCs and Corporations for their various business ventures is to create separation between their business and personal activities and assets, as well as separation between their individual businesses.  When the business owner commingles funds, it creates a rock solid paper trail intertwining everything that they had hoped to keep separate.

Recently I came into contact with a business owner who found himself in serious trouble due to commingling funds.  It wasn't necessarily an intentional action, but rather ignorance about what he could and couldn't do.  This cost him dearly when the business had to be dissolved in order to settle a judgment against him.  Because things like fuel, cell phones, and other personal expenses had been paid out of the business account it ultimately had to be treated as additional income and other benefits.  It was such a clearly defined example of commingling that the court was required to rule against him, regardless of his "lack of intent" to break the law.  This business owner learned a very costly mistake and it was one that could have been avoided.

Remember, the risks associated with commingling far outweigh any of the percieved benefits and I would encourage you to keep that in mind when assessing your internal business practices.

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