Identity Crisis – You Are Not Your Business

Posted on by LBS Tax

You Are Not Your Business
Most of us started our first job working for a company. We received a paycheck and at the end of the year we received a w-2 form. We were not the business, we worked for the business.

Well sometime ago you decided to start you own business and put some money in along with blood sweat and tears and somehow began to think of your business as an extension of yourself. You do the work, you get paid. But that is not the way it is supposed to work.

The IRS wants a clear picture of what is personal money and what is business money. When someone pays groceries from their business checking account the clearness is lost. When this happens repeatedly it puts the business and the owner in jeopardy. There are several thing s that can go wrong from the mixing of personal and business financial transactions.

The first thing that happens is confusion in accounting for the transactions making it difficult to calculate what is true income and true expenses of the business. It can be so bad that even if a business typically get some business supplies from Wal-Mart the IRS may determine in an audit that unless you have a receipt as proof of what the transaction is they will not accept it as a business expense because of the mixed transactions. This can cause the owner to document the legitimacy of all expenses.

The next problem is the protection from lawsuits is in jeopardy. The status of Limited Liability Company or corporation is a protective veil that separates the owner from business liability. One of the biggest reasons they are set up to create a barrier in case something goes wrong, the owners are protected from losing assets beyond what was invested to start the business.

If the business bank account is paying for personal expenses of it owner it is not being treated as a separate entity and therefore can be “collapsed” thus the protection is no longer available to the members or shareholders. This will cause a problem in both taxes and lawsuits.

Should the IRS audit a company that mixes personal transactions of the members or shareholders then the IRS can elect to take all the company’s net income and make it subject to self-employment tax which is an additional 15.3%.

We strongly recommend that each business entity have its own bank account. That the owners have separate bank accounts. If you are a shareholder in a corporation or S-corp or are a member of an LLC that is being taxed as a corporation you must take a paycheck just like any other employee. The only significance is that you are just the employee the final decisions rest on. You are not the company and should not have free rein to use business funds for your own personal benefit.

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