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Many small business owners make a common mistake: They use their business checking account or business credit card to pay personal expenses. They figure it's no big deal. They'll either pretend those were business expenses and deduct them on the business tax return (illegal!). Or they'll do the right thing and exclude them from the business tax return because they were, indeed, personal.

For small business owners, it's often a matter of convenience. One way or another, the money all belongs to the owner, right? So what's the difference if the business pays the owner and then the owner pays personal expenses... or if we cut out a step and the business just pays the expenses directly?

If you've formed an LLC, corporation, or partnership, there's a big difference. These entities are usually created to shield the owner from personal liability for things that could happen in the business. The legal entity separates the person and the business, so if a customer or vendor sues the company, the owner doesn't lose his or her house. (That's a bit oversimplified, but captures the essence of creating a separate legal entity for the business.)
That legal protection can be wiped away when the owner of the business starts co-mingling money and paying personal expenses from the business accounts. Paying those personal bills may be all someone needs to prove that the owner and the business are one and the same. After all, they share money and don't have a clean and clear separation. This is often referred to as "piercing the corporate veil," a claim through which someone suing the business might get access to your house (which you tried so hard to protect).

There are many times when it would be simpler just to pay a bill with the business checking account or use the business credit card for a personal item. Resist the temptation. As a business owner, it's important to keep all funds and all transactions completely separate. It's a good bookkeeping practice, and it can also be important if the business is ever involved in litigation.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

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