Some things generally do not mix, not too they are illegal but simply 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'll remember in entrepreneurship 101 class, your business and personal funds should be kept separate. You had been taught that drawings (personal expenses) ought to be accounted for in the financial statements if you can recall. When dealing with credit cards, exactly the same rule applies, so if you wonder if 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 likely 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 utilizing the same card you pay your suppliers with, and you may guess why. Ever heard of a company that went down because the owner couldn't keep his hands from the cash drawer? Some even go ahead and take stock to cater to their personal needs. Similarly, if you keep using the money designed to run your business for personal stuff, you'll most likely hit a bump on the highway that will adversely affect your business, maybe permanently. Therefore, even when it is not illegal to use your business charge card for personal use, keeping the two expenses separate a very good idea. You should also note some card providers explicitly tell you not to use the business credit for personal use.
Before you sign that cardholder agreement, browse the fine print, and if you are guilty of frequently mixing in 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 decided, your card will be canceled. However, if you accidentally use the business charge card for personal expenses, you can still correct the mistake. Refund the money spent to prevent reducing the available credit intended for your business. Remember to note down the cost so that you do not put it in the industry records during the bookkeeping process. This can apply if you are a sole proprietor, so if you are not, you will have to let the relevant people are conscious of your mistake to take corrective action.
What may be 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, however the effects of using it could land you in legal trouble. In a company, the business and directors are separate entities and therefore you cannot be held liable for the business’s debts. However, in certain business arrangements, there is no distinct line between the business and the owner. Consequently, 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 larger 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 over 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're simply unable to repay, then it will be reported in your credit report, that will bring it down. On the other hand, even if you clear the balance, your personal credit rating 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 don't want to have the IRS snooping around your financial records and find some blurry lines involving the business and personal expenses. The taxman isn't your friend, and if they find something 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 fail to prove that it was a personal trip. While business expenses are tax-deductible, personal ones aren't; you will increase your tax liability because you could not keep your affairs separate.
How to make sure you Do Not Mix Business and Personal Expenses
Now you know some of the risks of mixing personal and business 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 making use of your business credit card to pay for personal expenses is you do not have a personal credit card, the time is right you applied for one.
Business Savings Account
Besides two separate charge cards, you could also be tempted to keep your revenue and personal income in the same checking 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 company savings account ensures that you can track the way 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 operate business affairs. After all, if you want to grow the business, tracking the performance may be the only way to know which direction you're heading.