You have to do extra work to separate personal expenses from business expenses. You can’t just download the bank account transaction history to QuickBooks, Xero or Zoho Books, and know that all expenses are business related.
Instead, someone has to carefully comb through and re-categorize expenses. It’s an unnecessary manual step that saps business productivity. Besides, memory fades and makes it all the harder to re-categorize if you don’t get to it right away.
The founder of WeWork discovered this the hard way. The high-flying company, once valued at $47 billion, filed for an IPO in the summer of 2019. The filing disclosures revealed the founder’s self-dealing, including personal loans he got from the company at below-market rates.
The company’s biggest investor forced him out as CEO. In the end, he had to resign from the company he founded!
WeWork is a high profile example. Remember, though, even in a small business with no plans for an initial public offering, stakeholders could sue for misappropriation of funds, fraud or breach of fiduciary duty. So if there are other owners or investors, paying personal expenses from a business account will eventually catch up with you.
6. Could negate part of the Subchapter S benefit
A Subchapter S is an election you make with the IRS to treat taxes as a pass-through and avoid double taxation of both the corporation and the owner.
Another advantage of a Subchapter S is that it can reduce employment taxes (Medicare and Social Security taxes) for the owner. Here is how it works. The owner becomes an employee of the company. As long as he takes a reasonable salary, the owner doesn’t have to pay employment taxes on corporate distributions over and above the salary.
However, if the owner takes non-salary distributions without keeping good track of how much he is spending, he could run afoul of the IRS. Read More