Some things generally do not mix, not that they are illegal but because they carry many potential downsides. For instance, business and pleasure; meeting with potential clients in a strip club is not wise. If you are a business person, you will remember in entrepreneurship 101 class, your business and personal funds should be kept separate. You were taught that drawings (personal expenses) should be accounted for in the financial statements if you can recall. When dealing with credit cards, the same rule applies, so if you wonder whether it is illegal to use a business credit card for personal use, here's all you need to know.
Is it Illegal?
First, let's get this question out of the way; you are not going to end up in jail for mixing up your business and personal credit cards. However, it is not advisable to pay for your leisure activities using the same card you pay your suppliers with, and you can guess why. Ever heard of a business that went down because the owner could not keep his hands off the cash drawer? Some even take the stock to cater to their personal needs. Similarly, if you keep using the money meant to run your business for personal stuff, you will most likely hit a bump on the road that will adversely affect your business, maybe permanently. Therefore, even if it is not illegal to use your business credit card for personal use, keeping the two expenses separate is advisable. You should also note some card issuers explicitly tell you not to use the business credit for personal use.
Before you sign that cardholder agreement, read the fine print, and if you are guilty of frequently mixing up the two, you are at risk of violation. According to Fundera, card issuers will often remind you of the agreement you made by sending you emails. If they find out that you have violated the terms agreed upon, your card will be canceled. However, if you accidentally use the business credit card for personal expenses, you can still correct the mistake. Refund the money spent to avoid reducing the available credit meant for your business. Remember to note down the expense so that you do not put it in the business records during the bookkeeping process. This will apply if you are a sole proprietor, so if you are not, you will have to let the relevant people know of your mistake to take corrective action.
What is the Harm in Using a Business Credit Card for Personal Use?
It may not be illegal to use your business credit card for personal use, but the effects of using it could land you in legal trouble. In a company, the business and directors are separate entities meaning that you cannot be held liable for the business's debts. However, in some business arrangements, there is no distinct line between the business and the owner. As a result, as Bankrate explains, you will be personally liable for the business debts. Card issuers require you to agree that you will be held liable for a business card's balance. Therefore, the more you use the card for personal use, the higher the risk of running into legal trouble, especially if you charge huge expenses to the card.
Affected Credit Scores
Being able to pay off your credit in time gives you an impressive credit score, so you might be tempted to increase your chances of good scores by using the business card wherever you please. Unfortunately, if you keep making large purchases that reduce the business card credit balance and you are unable to repay, then it will be reported in your credit report, which will bring it down. On the other hand, even if you clear the balance, your personal credit score will not improve because the business credit cards report to business credit bureaus. Either way, you do not win, so you might as well keep the business card restricted to business expenses.
You do not want to have the IRS snooping around your financial records and find some blurry lines between your business and personal expenses. The taxman is not your friend, and if they find anything that does not look right, you will pay dearly. Paying for a personal luxurious trip to the Caribbean using your business card will have you paying fines if you cannot prove that it was a personal trip. While business expenses are tax-deductible, personal ones are not; you will increase your tax liability because you could not keep your affairs separate.
How to Ensure You Do Not Mix Business and Personal Expenses
Now that you know some of the risks of mixing business and personal expenses in your business credit card, here are a few tips from Fits Small Business to ensure you keep the two separate.
Get a Personal Credit Card
If the reason you keep using your business credit card to pay for personal expenses is that you do not have a personal credit card, it is time you applied for one.
Business Savings Account
Besides two separate credit cards, you could also be tempted to keep your revenue and personal income in the same savings account. This is risky because you might think your business is doing well, while in reality, most of the money is from your salary. Keeping a business savings account ensures that you can track how the business is doing and save for business emergencies.
Business Checking Account
Like a business savings account, a checking account ensures that you only use the business's money to run business affairs. After all, if you want to grow the business, tracking the performance is the only way to know which direction you are heading.
Written by Allen Lee
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