As a business owner, you might wonder if you can use your business debit card for personal expenses since the money is technically yours.
Also, for small business owners, it’s common to confuse personal and business expenses. When is it okay for your business to handle costs like coffee, and when should you use your own money?
In this article, you will learn how to segregate your personal and business finances, when you can use your business debit card, and what drawbacks are involved.
Why Should You Separate Personal and Business Expenses?
It can be tempting to combine your personal and business finances when beginning a firm. After all, it’s easy to think of them as interchangeable if you’re the sole owner of the business. But combining personal and business spending is not just inconvenient; it may even be illegal.
On the other hand, you will be able to clearly grasp your finances if you keep your personal and business expenses apart. This will offer you the certainty and confidence you need, in addition to shielding your company from potential tax and legal issues.
Why Is Mixing Personal and Business Expenses Risky?
You endanger both your company and yourself when you use your business debit card instead of your personal one.
It is not the end if you have already been mingling your funds for personal and corporate use. Don’t forget that you are already on your way to better money management after reading this article. Plus, you may make better future spending decisions if you are aware of the risks listed below.
1. Legal Issues
As previously said, using your corporate debit card for personal usage does not violate any particular regulations legally.
Nevertheless, you agreed to a contract with the card issuer or account provider when you opened a business checking account. There was probably a stipulation in this contract concerning using your business card for personal expenses.
Certainly, it is a violation of the terms and conditions of that agreement if one uses a business card to make purchases that are not business-related. You may probably encounter new legal complications due to this.
Additionally, if your company, whether it is a corporation or an LLC, fails or is sued, you are afforded special protection of personal property. However, if you decide to “pierce the corporate veil”, you risk losing this protection. This implies that using company funds for personal spending puts your assets in danger in the event of legal action or insolvency.
2. Poor Cash Flow Visibility
Having a clear understanding of your business cash flow will guide you in making strategic and informed decisions. Therefore, if you continue pulling money from the business accounts for your own use, it will be almost impossible to determine the financial health of your business.
Just as confusion between personal and business expenses hampers your understanding of your financial health, it also allows you to overspend and experience a cash shortage. If you use company funds to make personal purchases, you are faced with the risk of using the money destined for running costs, saving, or paying employees.
3. Disorganized Bookkeeping
The primary reason that so many entrepreneurs decide against combining personal and business costs is that it makes for an extremely difficult bookkeeping situation.
It can be difficult to maintain accurate records when you use your business card for personal purchases because your books are filled with pointless transactions. Sorting through all these intermingled transactions can also be a major hassle during tax season.
4. Tax Problems
Let’s talk about taxes. If you get nervous about tax season, mixing business and personal transactions will make it even more confusing.
To submit their taxes, business owners must use their revenue statements, expense reports, and other financial records. But if you spent the entire year making personal purchases, you’ll discover that it takes hours to distinguish between transactions that were personal and those that were business-related.
Even if you spend days sorting through your expenses, you could still end up with costly errors. Classifying a business expense as personal could result in missing out on allowable company tax deductions, or even worse, you could face legal issues if you try to deduct a personal expense as a business expense.
5. Audit Preparedness
Imagine an audit where the auditor finds out that you have been using funds from your corporate bank account for personal spending. As for legal tactics, even if you did not violate any legal procedures and policies, it is still possible that new clients and partners may choose not to work with you and your company.
One of the requirements that small firms need to keep in mind is the preparedness for audit by any party, including the IRS, an investor, or any other third party. How can you best maintain readiness? You’ll be fine if you use your business card only for business-related purposes.
When Should You Use Your Business Debit Card?
Although following all of these guidelines and cautions may not be enjoyable, doing so is necessary to operate a lucrative, ethical, and professional firm. So, when is it appropriate to use your corporate debit card for personal usage if you aren’t allowed to?
You can use your business debit card to pay for the following kinds of charges.
- Regular Payments: Your business debit card can be used to make any recurring payments relating to your firm. Software subscriptions, phone and energy bills, and office rent are a few instances of these periodic payments.
- Routine Business Expenses: Do you need a new stapler? You should be able to use your business debit card to pay for office supplies, printing charges, and other expenses that are directly associated with operating your business.
- Travel and Client Meetings: If you get to travel for work, it is wise that on every trip, you use your business debit card to pay for travel expenses such as accommodation, airfares, and meals with partners or clients. As long as you document the reason for each expenditure and keep your receipts with you, you’ll be fine.
- Employee Costs: Business debit cards might make it easier to compensate employees who make frequent transactions for the company.
Separate Your Personal and Business Expenses with Cheqly
While it is important to separate one’s personal life from business, it is equally important to keep track of all the expenses incurred in the business to protect oneself from legal implications. When these expenses are combined, it causes confusion in bookkeeping, poor control of cash flow, and may even violate laws. By adhering to the above information, the chances are high that the business will run smoothly while observing all the regulations.
Looking for a way to separate your business and personal finances? Cheqly offers the solution you need. It helps you keep your business expenses separate from your personal ones by providing dedicated business accounts and automatically tracking expenses. This separation makes accounting more accurate, improves financial control, and provides a clear view of the financial condition of your business so that you can manage the cash flow well and plan for the future of your business.
Open a Cheqly account today and take control of your business finances with ease!