What to Consider Before Using a Business Credit Card for Personal Expenses
Still, the severity of risk depends on your circumstances. Arguably, the biggest danger has to do with tax and liability, so we’ll start there.
Consider the Structure of Your Company
Limited Liability Companies and Corporations are two company structures that limit the personal liability of business owners. When an LLC or Corporation is created, a new legal entity is formed, separate from the owners. If you use a business credit card to pay for personal expenses, you don’t honor that separation.
By failing to maintain separation between yourself and your company, you expose yourself to being held personally liable for business debts. This happens when a court decides to “pierce the corporate veil.” In other words, if your business fails, and you’ve mixed personal and business funds, the court may decide that business debtors can go after your personal assets.
Understand the Tax Implications
Business owners can easily run into issues with the IRS when business and personal accounts are mixed. In the eyes of the IRS, using a business credit card for personal expenses puts all of your business credit purchases into question.
During an audit, the burden of proof is on the business owner to prove the legitimacy of all business credit card transactions. When business and personal expenses are mixed, proving your innocence becomes much more difficult.
Even if you aren’t audited, though, using business credit for personal expenses makes doing taxes even more time-consuming and expensive. That’s because, to ensure you’re only deducting true business expenses, you (or your accountant) will have to review each transaction.
Limited Protections Available for Business Credit Card Users
In 2009, the Credit Card Accountability Responsibility and Disclosure act was passed. This law gave consumers protection from certain fees and rate increases, but this law doesn’t cover business credit card users. That means business credit card issuers can raise rates based on payment history and hike interest rates on existing balances.
If you’re paying your bills on time and in full, you may be able to avoid rate hikes or unexpected fees, but it’s still important to be aware. Due to this, you should be very diligent about reading agreements prior to choosing a new business credit card.
What Will the Impact Be on Your Credit Score?
Many business credit card issuers do not report transactions to personal credit bureaus unless the account is in danger of defaulting. If you’re trying to build your personal credit history, this is a drawback. Of course, you may build a more robust business credit history, but you’ll have to weigh that against the risk of falling behind on payments.
If you fall behind, the interest expense you pay will mean that any potential benefits of awards or a strong credit history are quickly wiped away.
Do You Have the Revenue to Pay the Bills?
As mentioned earlier, the interest expense on business credit cards is not cheap. The Spark Cash for Business card by Capital One carries an APR of 18.24 percent. Business credit cards that offer more extensive rewards have APRs that are even higher. If you’re strapped for cash, and you have to cover interest expenses for a balance on both business and personal expenses, you could run into financial trouble.
If you ask most accountants or advisers, they’d likely tell you to avoid spending on personal expenses with a business credit card. That’s because the risks involved likely outweigh the relatively marginal benefits you might receive from generous reward offerings. As with any financial decision, there is no one-size-fits-all solution. Before making any significant moves, consider what’s covered in this post along with your own business needs.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.