Most business owners find it very difficult to separate their business account from their personal account. They are sometimes faced with situations where it is convenient for them to pay their personal bills and expenses with their business account. In some situations, they also receive money meant for personal purposes into their business account. They figure it is not a big deal. After all, the business belongs to them and the money is theirs.
So why then is it a bad business decision to use your business account for personal purposes? Here is why:
- Tax Purposes
When you receive money for personal purposes into your business account, the money is counted for an income due to you for tax purposes. Yes, that money received is taxable and may be subject to taxation under the Personal Income Tax. To qualify as business tax deductions, it must be shown that your expenses are for business purposes. You make it harder to separate business expenses from personal expenses when you pay personal bills with a business bank account. As a result, you may overlook legitimate taxable deductions, thereby incurring penalties from FIRS.
- It makes it easier to lift the veil of incorporation
One of the advantages of having a limited liability is that you are granted a separate legal entity from your business. Under the eyes of the law, you are a person, distinct and separate from your business. When you receive personal money into your corporate account, or pay personal bills and expenses from your corporate account, you make it easier for the law to lift the veil of incorporation and proceed after you for liabilities and debts incurred by your Company.
- It makes it harder to manage cash flow and outflow
The Business might not be able to keep accurate account of inflow and outflow of cash. Business expenses might not be paid because the money has been used to pay for personal expenses. This might lead to a cash inflow crisis.
- It is hard to tell when the Company is making profit or is running into losses. You will lack a clear picture of what your business makes and how much it spends expense.
- It becomes hard to draw up a business budget and stick to it.
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