Keeping it Separate: The Importance of Not Commingling Personal and Business Expenses for Attorneys

Understanding the Risks of Commingling Personal and Business Expenses

Commingling personal and business expenses can pose several risks for attorneys and their law practices. Here are some key risks to be aware of:

Loss of Financial Clarity:

Commingling personal and business expenses can create confusion when it comes to tracking and understanding the financial health of the law practice. It can make it challenging to accurately determine revenue, expenses, and profits, which can hinder effective financial management and decision-making.

Audit and Taxation Issues:

Commingling personal and business expenses can result in audit and taxation issues. It can also be challenging to separate personal and business expenses during audits or tax assessments, which may lead to fines, penalties, or legal actions by tax authorities. It can also trigger suspicions of tax fraud or result in loss of tax deductions, further complicating the financial and legal situation.

Legal Liability:

Commingling personal and business expenses can expose attorneys to legal liability. When personal and business expenses are mixed, it can be difficult to establish a clear line of separation in case of legal disputes, lawsuits, or creditor claims. This can put personal assets at risk and jeopardize the financial security of both the attorney and the law practice.

Ethical Concerns:

Commingling personal and business expenses can raise ethical concerns for attorneys. Many legal associations and bar associations have strict rules and guidelines on handling client funds and maintaining proper accounting practices. Commingling personal and business expenses can violate these rules, leading to ethical complaints, professional sanctions, and damage to the attorney’s reputation.

Best Practices for Keeping Personal and Business Expenses Separate

To avoid the risks associated with commingling personal and business expenses, attorneys should follow best practices for maintaining a clear separation between personal and business finances. Consider implementing one or more of the following best practices: 

Establish Separate Bank Accounts:

One of the fundamental steps to keep personal and business expenses separate is to establish separate bank accounts. Attorneys should have separate bank accounts for personal expenses and business expenses. All business-related income and expenses should flow through the business bank account, and personal expenses should be paid from the personal bank account. Avoid using personal funds to cover business expenses or vice versa.

Maintain Proper Record-Keeping:

Accurate and detailed record-keeping is crucial to keep personal and business expenses separate. Attorneys should maintain separate records for personal and business expenses, including receipts, invoices, and other financial documents. It’s essential to keep a clear trail of all financial transactions related to the law practice and ensure that they are properly categorized and accounted for.

Use a Dedicated Business Credit Card:

Using a dedicated business credit card can help keep personal and business expenses separate. Attorneys should use a business credit card solely for business-related expenses and avoid using personal credit cards for law practice expenses. This can simplify the process of tracking and categorizing expenses and provide a clear separation between personal and business finances.

Avoid Cash Transactions:

Using cash for business expenses can blur the line between personal and business expenses, making it difficult to maintain separation. Attorneys should avoid using cash for business transactions and instead use checks, credit cards, or electronic payment methods that can be easily tracked and recorded.

Conclusion

For attorneys, it is always best to simply keep the business and personal income and expenses separate from each other. It can be tempting to get the extra “miles” or “points” that you can use for flights and vacations by using your personal credit card, but the risks and the repercussions of failing to properly separate business and personal transactions typically outweighs the benefits. Especially if there is penalties, fees, or loss of legitimate deductions as the result of an audit.