The business formation or startup process is fraught with risk. A substantial portion of new businesses fail within the first few years. Entrepreneurs can also make mistakes that expose them to legal and financial liability.
One of the most common mistakes people make when starting a business is to use personal bank accounts and credit cards for business purposes. Even if they start a limited liability company (LLC) or other business that could shield them from personal liability, a failure to separate their finances could leave them vulnerable.
Commingling finances can cause issues later
Mixing personal resources with business assets is a form of commingling. Entrepreneurs may not realize that they could put their personal assets at risk by using their personal checking accounts or credit cards for business purposes.
In scenarios where there have been inappropriate financial actions, including commingling, outside parties can hold business owners accountable for company debts. Whether the business fails, files for bankruptcy or faces a lawsuit, outside parties could try to hold the owner accountable by asking the courts to pierce the corporate veil. Both personal property and future income could be vulnerable in such scenarios.
Essentially, those hoping to hold a business owner accountable ask the courts to make the owner of the business directly responsible for financial obligations that technically belong to the business. Proof of commingling and other financial mistakes can potentially convince the courts to hold the person who formed the business personally accountable for organizational debts.
Establishing separate financial accounts is an important part of the business formation process. Entrepreneurs who learn about common mistakes and who secure appropriate support have less reason to worry about their resources when starting a business.