For the owner of a business, it can be easy to lose track of the line between work and personal life. Business owners spend much of their time at the office as well as working at home. If you're the sole owner of a company, no law prevents you from using business funds for personal expenses. However, tax law and your business' structure may complicate the situation.
From a tax standpoint, personal expenses and business expenses must be separated. For example, if a business owner buys copy paper for the office, it's a business expense. If he buys copy paper for home using a company account, that is a personal expense. When it comes time to prepare tax returns, that personal expense must be reported as an "owner's draw" and counts as business income for the owner.
Business expenses become more complex when a business is not a sole proprietorship. A co-owner of a business is responsible for accurately reporting any expenses for which he is responsible. Theoretically, buying lunch on the company card without reporting it could be construed as partner fraud. If the company is a corporation, especially one with multiple stockholders, the situation becomes even more complicated. Federal tax and corporate law strictly regulate accounting practices to protect the stockholders. In these cases, your best strategy is to consult with your lawyer or accountant for advice regarding your specific situation.
Business owners can expect significant tax benefits from funneling expenses through the business, financial advice author Rob Kiyosaki points out. For example, a car owned by the company can be paid for with pretax dollars and used freely as an executive benefit. However, any obvious abuse of the practice is subject to taxation and possible penalties. As with partnership situations, this kind of arrangement should be approved by tax and legal professionals with a deep knowledge of the current and updated laws.
Another risk of using business funds for personal expenses is setting a precedent for co-mingled funds. One advantage of business ownership is a degree of shelter from liability and debt: Money a closed business owes does not generally become the responsibility of the owner. However, if a creditor can prove that the owner's personal and business funds were used interchangeably, it can win a judgment forcing the owner to pay out a debt from personal funds.
Can a Business Owner Use Business Funds?
Yes, but it's a bad idea. Co-mingling personal expenses with business expenses complicates paperwork and exposes both the business and owner to risks. The better practice is to move specific personal expenses into the business accounts, providing yourself with employee perks. It's advisable to seek the help of a lawyer or accountant when setting this up.
- "Small Business for Dummies"; Eric Tyson; 1998
- "Rich Dad, Poor Dad"; Rob Kiyosaki; 1998
- "The E-Myth Revisited"; Michael Gerber; 1998