# Company money, kept apart

> Company money lives in company accounts. Mixing it breaks the books, weakens the tax return and puts the liability shield at risk.

Source: https://lopifi.com/learn/separate-business-and-personal-money
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**Why does a startup need a separate business bank account?** Company money lives in company accounts. Mixing it breaks the books, weakens the tax return and puts the liability shield at risk.

Northwind's first entry is the founders paying $60,000 into the company's bank account for their shares. That entry is only possible because the account is the company's, in its legal name and under its EIN. Before then there's nowhere for the company's money to be.

*[Journal entries: JE-1]*

JE-1: the founders buy their shares.

> “One of the first things you should do when you start a business is open a business checking account. You should keep your business account separate from your personal checking account.”

— [IRS Pub. 583 (12/2024), Recording Business Transactions — Business checkbook](https://www.irs.gov/publications/p583), Open a business account, and keep it separate

## What commingling breaks

[Commingling](https://lopifi.com/md/glossary/commingling) is running company money and personal money through the same account or card. It looks harmless at the start, when the founder's card is the only one that works. It breaks three things.

| What breaks | Why |
| --- | --- |
| The books | Each personal charge in the company account has to be found, explained and moved out, and each company charge on a personal card has to be found and brought in. A [Reconciliation](https://lopifi.com/md/glossary/reconciliation) becomes a memory test, and the [audit trail](https://lopifi.com/md/glossary/audit-trail) has gaps |
| The tax return | A deduction needs [Evidence](https://lopifi.com/md/glossary/evidence) that the cost was the company's. A charge on a personal statement among groceries is a weak exhibit |
| The liability shield | Owners are generally not liable for a corporation's debts, but courts can disregard the corporation. Mixing the company's assets with an owner's is one of the factors they weigh |

Three things that stop working when the money is mixed.

> Background reading, not the rule. Courts decide whether to pierce the veil under state law, case by case, and a lawyer is the person to ask about a specific company.

— [Wikipedia, “Piercing the corporate veil”](https://en.wikipedia.org/wiki/Piercing_the_corporate_veil), Piercing the corporate veil

**Scenario — Six months on a personal card.** A founder pays for the company's domain and a few months of software on a personal card, and expenses nothing. At the seed round, diligence asks for every vendor and every cost. The bookkeeper spends a week finding the charges in personal statements, and some are never found: the company's costs are understated, and the founder is out of pocket.

## Every crossing gets an entry

Separation doesn't mean money never crosses between a founder and the company. It means every crossing is a recorded transaction, with a document behind it and an entry that says what it was.

| What happened | What it is | The entry |
| --- | --- | --- |
| A founder pays a company cost personally | A reimbursement owed to the founder, with the receipt | Dr the expense, Cr cash when the company repays. Until then, a liability to the founder |
| The company pays a founder's personal cost | A receivable from the founder, to be repaid. It isn't a company expense | Dr a receivable from the founder, Cr cash |
| A founder puts more money in | Shares, a SAFE or a loan, each on its own document | Dr cash, Cr [Equity](https://lopifi.com/md/glossary/equity) or a liability, as the document says |
| A founder takes money out | Pay through payroll, or a [Dividend](https://lopifi.com/md/glossary/dividend) the board declares | Payroll expense, or Dr dividends, Cr dividends payable |

The four ways money crosses between a founder and the company, and how each is recorded.

Northwind's board declared a $500 dividend on September 30. It isn't an expense, and it doesn't come out of a founder's card: it's a board decision, recorded as a liability on the day it's declared and paid from the company account in October.

*[Journal entries: JE-14]*

JE-14: money to the owners, through the front door.

**Wrong:** The founder puts the subscription on a personal card and, at year end, the bookkeeper is asked to "add it in somewhere."

**Right:** The software subscription goes on the company card. When a founder has to use a personal card, they submit the receipt and the company reimburses them from its own account.

The fix isn't to stop founders spending. Give the spending a channel: a company card, a receipt, and a reimbursement that's recorded.

## The setup

*[Figure: corporate cards]*

Company cards: each charge is matched to its receipt and coded. Illustrative transactions.

| Set up | Why |
| --- | --- |
| A business checking account in the company's legal name, under its EIN | The account every entry is reconciled to |
| A company card for each person who spends | Each charge names who made it |
| Receipts attached to each charge, at the time | The evidence behind the deduction and the entry |
| The bank and card feeds connected to the books | Every transaction arrives in the ledger |
| A monthly reconciliation of every account | The books agree with the bank, or the difference is explained |

Company money, set up once.

*[Figure: bank feed]*

Bank and card feeds bring every transaction into the books. Illustrative accounts.

> **The company's money lives in the company's accounts. Anything that crosses to or from a founder is a transaction, with a document and an entry.**

Where this goes next: the bank reconciliation in [Closing the month](https://lopifi.com/md/learn/closing-the-month) is the monthly proof that company money stayed company money. Paying through the right channel is [payment runs and fraud controls](https://lopifi.com/md/learn/vendor-payment-runs-and-fraud-controls), and putting more money in is [the ways to raise startup capital](https://lopifi.com/md/learn/ways-to-raise-startup-capital).

## Where this lesson's rules come from

- [IRS Pub. 583 (12/2024), Recording Business Transactions — Business checkbook](https://www.irs.gov/publications/p583) — Open a business account, and keep it separate (irs)
- [Wikipedia, “Piercing the corporate veil”](https://en.wikipedia.org/wiki/Piercing_the_corporate_veil) — Piercing the corporate veil (reference)

## Read further

- https://lopifi.com/md/journal-entries/issuing-common-stock
- https://lopifi.com/md/journal-entries/credit-card-expenses
- https://lopifi.com/md/journal-entries/dividends
- https://lopifi.com/md/startups/company-cards-and-receipts
- https://lopifi.com/md/startups/employee-expense-reimbursements
- https://lopifi.com/md/startups/bank-reconciliation-step-by-step
- https://lopifi.com/md/accounting/reconciliation
- https://lopifi.com/md/accounting/audit-trail
- https://lopifi.com/md/docs/domain/07-cash-and-treasury

- **Track:** [Back office core](https://lopifi.com/md/learn/core)
- **Lesson:** Lesson 3 of 9 — 8 min
- **Terms taught:** [Commingling](https://lopifi.com/md/glossary/commingling), [Reconciliation](https://lopifi.com/md/glossary/reconciliation), [Audit trail](https://lopifi.com/md/glossary/audit-trail), [Evidence](https://lopifi.com/md/glossary/evidence), [Equity](https://lopifi.com/md/glossary/equity), [Dividend](https://lopifi.com/md/glossary/dividend)
- **Previous:** [The entity and its numbers, Core · Lesson 2](https://lopifi.com/md/learn/ein-and-state-registrations)
- **Next:** [The books, in one lesson, Core · Lesson 4](https://lopifi.com/md/learn/how-startup-books-work)
- **The course:** https://lopifi.com/md/learn