The Biggest Mistake LLC Owners Make
Disclaimer: I am not a CPA or an attorney. I'm just a bookkeeping professional who cares.
So, what is the biggest mistake LLC owners make? Commingling funds, which means using business funds for personal expenses and using personal funds for business expenses, or, worse, not even having separate accounts for the business.
To understand why this is a huge mistake, let's just break down what LLC stands for: Limited Liability Company. I think we all understand Company. So what is the Limited Liability referring to? It's the corporate-like (this will come back up later) protection awarded to the business owners against personal liability. According to Cornell Law, what this means is that "if the company loses a lawsuit or has other debt, the judgment is against the company, and not its owners, or shareholders. If the judgment or debt makes the company go bankrupt, the shareholders would lose the value of their shares, but, because of the concept of limited liability, the judgment is not enforceable against the shareholder’s other assets." Basically, if someone sues your company or your company goes bankrupt, they cannot go after your personal assets.
But what happens if you commingle funds? Well, if you use personal funds for business expenses, this can be considered an owner's contribution, but still, should be purposeful and clearly recorded. If you use business funds for personal expenses, you're blurring the lines between what is business and what is personal, as if you're using the business accounts as a personal ATM. If you're using the same accounts for both business and personal, then there is no distinction at all, and you might as well not even have an LLC. In either case, if there is litigation against your company then you have opened the way for the courts to "pierce the corporate veil" or for creditors to do so in the case of serious business debt. Remember the corporate-like protection mentioned earlier? That would be gone. In other words, commingling funds = bye bye, limited liability.
So, what to do if you find yourself in this situation where you have been commingling funds? First of all, if you do not have separate accounts, then please, before you do anything else, go open separate accounts for your business and keep a reasonable amount of capital in your business to account for its operations. If you already have separate accounts, you'll need to develop good habits of using your business accounts for business purchases and business assets for business purposes, and also make sure business purchases from personal accounts are clearly recorded as owner's contributions. The sooner you do this, the better.
If you need any assistance with your bookkeeping or setting up your business, please feel free to set up a free 30 minute consultation with me to see if my services would be a good match for your business needs.
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