Can a Business Owner Take Money from a Business Account for Personal Use?
One of the most common questions for small business owners is whether they can take money or capital from their business account and put it in their personal account. While this action may seem harmless at first glance, it actually constitutes a form of embezzlement.
Rules and Regulations
While there are no conclusive laws specifically forbidding the practice of taking money from a business account, it does violate the principles of sound accounting and effective business management. Most financial experts advise that owners refrain from taking funds from the business for personal use, with the exception of owner draws, shareholder distributions, or salaries.
Taking other funds can significantly jeopardize the business's capitalization and solvency. If the practice is not done carefully, it can result in serious financial repercussions. It's essential to maintain a clear distinction between personal and business funds to avoid such issues.
Taxes and Accounting
When you take money from the business, it must be recorded and categorized in your books accurately. You need to consider categorizing it as an owner’s draw, a shareholder distribution, or a salary. Proper categorization will ensure that the funds are reported and taxed correctly.
To avoid illegally misstating income or erroneously deducting expenses, it is crucial to work with an accountant. They can help you establish ownership draw policies and devise appropriate tax strategies. This will help you maintain compliance with tax laws and regulations.
Liability Risks
Excessive personal withdrawals can pose significant risks to your business. Creditors may view it as a red flag and consider it a sign of financial instability. Keeping enough operating capital in the business is vital to ensure that all debts and obligations can be met.
If you plan to sell your business in the future, showing healthy cash flows and substantial capital reserves can significantly increase its value to potential buyers. By following proper accounting practices, you can protect both your personal and business finances.
While not categorically illegal in all cases, taking money from a business account for personal use does carry several hazards. It's important to follow sound accounting practices and ensure that you can justify your actions according to tax codes and applicable regulations.
If you're unsure about your legal obligations, it's always a good idea to consult with an attorney, a financial advisor, or an accountant. Working with these professionals can help put the right controls and reporting procedures in place, ensuring the protection of both your personal and business finances.
I have observed instances where business owners have taken money from the business account and accounted for it as an owner’s draw, dividend, or salary. These transactions were properly recorded, taxes were paid, and they had the approval of co-owners, investors, or bankers who have covenants on loans. In such cases, the business owners had no problems as a result.
On the other hand, taking money from the business account without informing the appropriate parties, paying the related taxes, or properly accounting for it can lead to severe consequences. I would never recommend getting involved in such practices without proper guidance and legal compliance.
Remember, embezzlement is a serious matter with potential legal and financial ramifications. It's always better to maintain clear and ethical financial practices to protect both your business and personal finances.