A fundamental rule of business is to keep your business expenses separate from your personal expenses. There are at least two big reasons for that, and those reasons are about risk management.
First of all, using a business credit card to pay personal expenses during a business trip or for a big-ticket item for the business that also benefits the owner seems innocent enough. But there are risks and terms of business credit cards that don’t offer the same protections as personal credit cards.
Secondly, there are laws regulating certain business entities that include liability protections for owners and directors known as the “corporate veil.” One way to pierce the corporate veil and expose you to personal liabilities involves expenses or business practices that appear to benefit you more as an individual than benefit the company or its customers.
Let’s look more closely at these two risk management areas to demonstrate the value of keeping business and personal expenses cleanly separated.
Business Credit Card Risk
Business credit cards usually offer lower rates as well as business-oriented rewards and perks. They help small business owners who don’t want to take out a loan or larger business line of credit. Cards offer the convenience of use as well as documenting monthly business expenses for budgeting. Business card accounts can be easily set up within bookkeeping and bill pay systems to track and pay expenses.
Although it is not illegal to place personal expenses on a business credit card, you are not as personally protected under business credit card terms. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 eliminated several unfair practices toward consumers such as unexpected interest rate hikes or double billing in a cycle. Users of business credit cards do not have those same protections. Credit card terms may also prohibit users from charging personal expenses on their card, potentially resulting in freezing your credit or cancellation of the card.
From an accounting standpoint, mingling personal expenses with business expenses on your business credit card also creates a big problem with maintaining accurate bookkeeping and accounting. Without accurate financials, business owners run the risk of underreporting revenue or overstating expenses. Personal charges on a business credit card can come to light in an IRS audit and may put you at risk for tax penalties if you can’t confirm their business purpose.
Piercing the Corporate Veil
Businesses that are Limited Liability Companies (LLCs) or types of corporations (C Corp or S Corp) protect the personal assets of owners and directors. These structures, when set up properly, prevent personal assets being taken to pay off corporate debt or settle business lawsuits. That protection is called the corporate veil, and it’s valuable for entrepreneurs who are taking the risk to start and grow a business.
Some of the situations that courts have deemed as piercing the corporate veil include failing to keep personal funds separate from business funds or paying for personal expenses with a business credit card!
If a court has evidence of these practices, it can leave an owner or shareholder personally responsible to pay business debt or legal expenses and settlements.
Business Risk Management Tips
It is highly recommended that business owners maintain separate personal checking and savings accounts from their business accounts. The same separation should be maintained with business credit cards. At the end of each month, your credit card statement will be a clean document of business expenses that can be recorded in your books. This will support a more accurate picture of your business cash flow and budgeting.
This simple practice will also maintain stronger protections for your personal assets as the business grows in profits and complexity.
Contact us as WhippleWood regarding questions about your business practices and how to protect your personal assets.
Sources: BankRate.com, Corpnet.com
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