Commingling Funds: How to Address the Problem and Avoid It in the Future

commingling funds

One of the most common problems for startup founders is the commingling of funds: when you pay for personal transactions from a business account, or visa versa. 

The solution to commingling funds is simple but tedious. You must identify and reclassify the transactions as fringe benefits or as loans from your company to yourself. You’ll reimburse yourself if you’ve used personal accounts to pay for business expenses. 

We’ll break down the step-by-step process for implementing these solutions, explain why commingling funds is risky in the first place, and show you how to make separating funds easier in the future.

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What Are the Consequences of Commingling Business and Personal Funds?

Quite a few issues can arise if you mix your business and personal funds— from minor inconveniences to high financial costs and even legal trouble. 

Tracking Expenses Accurately Is Difficult

How profitable were you last year? Last quarter? Mixing funds makes this information difficult to track. Future investors or creditors will want to know your financials, not to mention the confusion this will bring come tax time. 

Claiming Tax Deductions is Harder

When running a business, saving the maximum amount of money with tax deductions is vital to maintaining financial health. However, you can’t deduct what you don’t document and shouldn’t deduct what you can’t prove was a business expense. Mistakenly taking personal expenses as small business tax deductions also opens you to risk during an audit. 

You May Lose the Liability Protection Your Company Provides

Under normal circumstances, running business funds through your company protects your personal assets from creditors. If the company goes bankrupt, creditors are only allowed to liquidate the company, not personally owned assets.

However, commingling funds ends this protection in what lawyers call “piercing the corporate veil.” A pierced veil means creditors can take you to court, argue that your “business” and “you” are not separate, and come for your private belongings. 

Related: Learn how liability protection defines the difference between Sole Proprietorships vs. LLCs

Is Commingling Funds a Crime? 

Most of the time, commingling funds is an honest mistake, but there are scenarios where it can land you in serious trouble. 

  • If you’re part of a multi-member LLC or corporation, your fellow owners may consider commingling funds as a form of theft.
  • Taking out a loan in the business name and spending that money for personal rather than business purposes is seen as fraud in the eyes of the law.
  • In the legal, real estate, or financial services industries, commingling client funds with personal is illegal.
  • Individuals with a fiduciary responsibility to clients, such as trustees or financial advisors, must separate client funds.
commingling funds

How Do I Correct Commingling Funds?

It’s understandable, even common, for entrepreneurs to find that their business has been commingling funds. And when your business is still young, the risks associated with commingling funds may feel far off. 

But commingling funds can have severe consequences for your business or personal assets. So here’s how to fix the mistake:

Step 1: Find the Transactions

Comb your business financials and find every transaction that looks like a personal expense. This step can be time-consuming, especially if your business has a lot of transactions throughout the year. But it’s essential to be thorough to ensure you’ve caught everything.

Indinero’s online bookkeeping services are here to help with this tedious task.

Certain expenses are more likely to be flagged by the IRS: hotels, travel, meals, groceries, car payments, rent, cosmetics, clothes, and entertainment. Anything categorized as miscellaneous may pique the IRS’s interest as well.

Step 2: Re-Classify as Fringe Benefits or Loans 

Once you have found your personal transactions, it’s time to decide how you would like them treated.

Fringe Benefits

The most straightforward practice is to amend your payroll reports and recategorize the commingled purchase as fringe benefit compensation.

The IRS’s Employer’s Tax Guide to Fringe Benefits defines a fringe benefit as a “form of payment for the performance of services.” In their eyes, this personal expense is just as much a form of compensation as their salary.  

In other words, making personal purchases (like a haircut) on a business account is no problem if you include the spending in your payroll as a fringe benefit.

This process will result in taxable income to the shareholder. If this were the only transaction, the shareholder would receive a W-2 for that amount at the end of the year, even though they never actually received any cash. The company would then receive a deduction for the amount because it did not receive a deduction when it was first recorded as a shareholder loan.

Popular accounting tools will have features allowing you to note transactions as fringe benefits. If you’re not using one, create a written document detailing the time, purpose, and price alongside a note indicating the new classification. 

A Loan From the Company to You

Fringe benefits may be the easiest way to deal with commingled funds, but they come with a significant drawback: The spending will now be counted as income, subject to income and payroll tax. 

Avoid this issue by treating the situation as if the company had loaned the shareholder money.  While changing the nature of a transaction after the fact isn’t technically allowed, tax professionals are known to do this. Proceed with caution. While rebooking the transaction as a loan is unlikely to raise red flags, it isn’t technically allowed, as any true loan should be part of a proper loan agreement. 

Having an experienced tax expert on your side is best for this approach. If you’d like to outsource the tedium of this task while avoiding payroll and income tax along the way, indinero’s online bookkeeping services are here to help.

Additionally, if your company is an LLC or S-Corp, after classifying the transaction as a loan, you may have the option of treating it as a reduction of your capital account. While capital reductions are tax-free (depending on the partner or shareholder’s basis in the company), smaller businesses usually do not have large enough capital accounts to handle this.

 Step 3: Pay Tax on the Fringe Benefit or Pay Back the Loan

With the fringe benefit route, you’ll process a cashless bonus via your payroll provider. The gross amount of the bonus and proper payroll taxes and withholdings will be spent.  You can have your payroll provider debit the payroll taxes but not process the amount, and you have effectively paid back your company for personal expenses throughout the year.

If treating this as a loan, simply pay back the loan amount with your personal funds.

What if I’ve Paid for a Business Expense With a Personal Account? 

This one is a more straightforward solution. Simply reimburse yourself for the amount of the expense in the same manner that you usually pay yourself.

How to Avoid Commingling Funds in the Future

Fixing commingled funds can be a major headache, so it’s best to have a system for keeping your books in order. Separating personal and business accounts between different banks is the most effective method. By doing so, you’ll not only have separate credit and debit cards, but you’ll also have a better sense of separation between the funds. 

Drawing the Line Between Personal and Business

If you’re new to running a business, you may wonder how to tell the difference between personal and business expenses. What are you allowed to deduct? We’ve written about small business tax deductions before, but simply put:

The IRS defines what qualifies as a business expense:

“The tax law requires business expenses to be ordinary, or common and acceptable in your trade or business, and necessary, or helpful and appropriate for your trade or business.”


Commingling funds can be a serious problem. It opens you to personal liability for business debts and potential legal issues. Fortunately, there are solutions: classifying personal expenses as fringe benefits or as loans from the business to yourself, are the methods accounting professionals recommend.

Going forward, it’s best to maintain separate bank accounts for personal and business spending, as well as to keep your books diligently.

If you find yourself needing to fix things retroactively and don’t have the time to untangle the problem yourself, indinero accounting and tax services can manage the issue for you. 

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