Are you already using your business bank account to pay for personal expenses? You might have bills due tomorrow and to save time you pay the mortgage or utility bill directly from the business account. Are you OK? This article will answer that question.
As with many tax questions, the answer is “it depends”. It depends on the type of legal entity you have. If you are a sole proprietor, as far as the IRS goes, it doesn’t really matter if you are paying personal expenses on the business account. For tax purposes, even if you report your business on a separate form (Schedule C), there really is no legal difference between you and the business.
If you are a business, things get a bit tricky. If you are a C corporation, you distribute the profits of the corporation on behalf of a shareholder, which will require you to issue a 1099-DIV at the end of the year for all of those profit distributions.
If you are an S corporation, these payments would also be considered a profit distribution, although S corporations typically do not issue a 1099-DIV for such a transaction. In an S corporation, the shareholder must declare their share of the profit on their personal return anyway, whether or not the profit is distributed through cash payments or personal expense payments.
The biggest problem with doing this in a corporation is that you don’t act like a corporation. A corporation is a separate legal entity. And therefore, he really shouldn’t be paying the shareholders’ personal expenses. If someone takes legal action against the company and this type of activity is discovered, someone could easily use these personal payments as proof that this so-called company is not really a company, and you would lose. then the benefit of limited liability. It’s called “piercing the corporate veil” and you certainly don’t want to go.
Whatever the legal consequences, also keep in mind that you cannot treat these personal expenses as business expenses, no matter what type of legal entity you have. So just because you write a business check to pay for your groceries doesn’t mean it becomes a deductible business expense.
If you own a business, why not run it like a business? Does Microsoft Pay Bill Gates Personal Expenses? Keep your books clean. In a sole proprietorship, if you need to withdraw money from the business to pay personal bills, first transfer the money to your personal account and write the check from there. In a business, write yourself a paycheck or dividend check, but don’t muddy the waters by treating your business account as if it were your own personal expense account.