The Synergy Group
1st Dec 2011
Here’s a scenario for you: You’re the sole owner of a limited company and have no employees. Every once in a while you find yourself a bit short, so you let the company pay for some of your personal expenses, such as dry cleaning, gym membership and house cleaning services. You’re not depriving a business partner or any employees of a salary so, in essence, it’s your money to do with as you like. Right!
Due to the fact that your business is a separate legal entity, you need to think of it as if it were another person completely. For example, you wouldn’t just walk into the book shop and take money out of its cash register for your lunch, would you? No. And you wouldn’t just stick your hand into your friend’s handbag to take money out of her wallet–you’d ask for permission. Similarly, for tax and CRO reasons, you need to “ask” your limited company for permission to take funds for your personal use.
How do you do this?
By writing a cheque to yourself from the business account for your salary (or expenses), depositing the check into your personal account, and using the funds from there. Or maybe by using a petty cash system!
Having the company pay directly for your personal expenses can get you into a whole heap of trouble. If your limited company is sued by creditors for non payment, it could be found that you “stripped” the company of the money needed to meet these obligations by using company money for your personal expenses. As a result, a court might consider your actions to be fraud. A court then could ignore the limited liability protection your company is supposed to provide and leave you personally liable for all company debts (known in America as “piercing the corporate veil”). Another grave danger is when business owners use one bank account for both business and personal expenses. This becomes known as “commingling funds” – also a no go area, and also grounds for disregarding the personal asset protection that a company can provide. In a limited company situation I have never heard of this happening, but I have as sole traders (business names).
Even for businesses operating as sole traders, where you take personal liability, it’s a far better practice to open a separate bank account for your business activities. Look at it this way: It really doesn’t take that long to write yourself a cheque to deposit into your personal account. Plus, you’ll receive two important benefits:
- You’ll start to develop the kind of business mindset your company needs in order to grow, and
- You’ll save a great deal on accounting fees, because the separation between business and personal (and what’s legitimately tax-deductible) will be that much clearer.
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