Horse businesses don’t lend themselves to having a good “work/life” balance, but most of us don’t mind because horses are our life, and we love having them as our business—whether our primary income or on the side. Unfortunately, sometimes this blurring of lines between our business and our personal lives carries over to how we manage our money. It’s called “co-mingling funds”, and it’s a problem.
When you’re first starting out, you’re often paying business expenses and buying business equipment with your “regular” bank account. So it may seem natural to keep on this way—but doing so is the biggest mistake you can make—in any business, but especially in the horse business, which is a favorite target for IRS scrutiny.
If your business is a separate legal entity—an LLC or partnership—the business entity must have its own business checking account. Even if you’re a sole proprietorship, open a business account if the bank will let you. If you freelance under your own name, you may have to settle for a second “personal” checking account to use for only your business money.
Having separate accounts is not enough, though. You have to put some effort into making sure you use them properly—business account for business transactions, personal account for personal transactions. No matter how completely entwined your business and personal life are, keeping the finances separate is important.
Credit cards are another area where it’s easy to co-mingle business and personal. It may seem like the only option, if your business is too new to have established its own credit. But having a separate card account for business purchases is important—even if the card itself is in your (personal) name.
If your horse business is your primary livelihood, and you need funds from it pay your personal expenses, there are two appropriate ways to move funds: 1) Put yourself on salary or 2) Make properly-documented distribution payments to yourself. Then use the salary or distribution to pay your personal bills—from your personal account.
Having a good bookkeeping system and updating it frequently makes it easier to catch and correct (reclassify) the occasional accidental commingling of expenses (grabbing the wrong card in a hurry at the gas station, for example). If these sorts of mistakes are more than one-off occurrences, look for ways to improve your processes. Automated online payments are a great tool for streamlining cash outflow, and assuring bills are paid with the appropriate account. Emailed invoices with electronic payment links eliminate grabbing the wrong deposit slip.
If you’ve been treating your business as a personal piggy bank, the best time to fix the problem is now.