Commingling funds

One of the most common mistakes small business owners make is mixing their company and personal finances.  Every company needs to have it's own bank account, all sales need to be deposited into the company account.  When the small business owner is a Sole proprietor or LLC you will pay yourself a "draw" check.  Take that check and cash it or deposit it into your own account, it's yours.  But the money in the business account must only be spent on business expenses.  If your company is a corporation S-corp or C-corp then the business owner is an employee of the company and gets paid as such with withholding taxes.  These examples are very simplified and you do need to consult with your tax accountant as to the proper method for you to pay yourself.

http://en.wikipedia.org/wiki/Commingling

If you don't pay yourself, but instead use the business account to pay for personal expenses, then you are commingling funds.  This is very time consuming from a bookkeeping view point to record properly.  Not to mention if the IRS ever decided to audit you, they may decide to disallow legitimate business expenses because you have commingled funds.

I will guarantee you that it takes bookkeepers longer, costing you more to record all of these transactions than if you had keep your personal and business finances totally separate.

Another form of commingling we've seen is when one person owns 2 or more companies, and commingles company funds.  Company "A" pays the loans for company "B" etc.  Again, this takes much longer to record properly and it's just bad business.  Imagine if you will McDonald's paying Burger King's bills, sounds ridiculous right?

Businesses are to be treated as the separate entities that they are.  Even if you're a Sole Proprietor or LLC the business does not exist without you, but you must treat the business as a fully separate entity when it comes to managing the finances.  Once you have then your bookkeeping will be much "cleaner" and straight forward.  Financial statements will be easier to read and there will less stress in your life trying to figure out where you stand financially.

One of the most difficult challenges people face is living within their means, and learning to pay themselves first.  I recommend all business owners read "Rich Dad Poor Dad" by Robert Kiyosaki.