Granted, it's tempting. Banks are stuffing your mailbox with offers for personal credit cards that boast single-digit interest rates. And you'd be lucky to find a business credit card with a rate of less than 15%. So why shouldn't you put everything on your personal card and save on interest charges?

Because it's a really lousy idea. In fact, any time you commingle personal and business assets, you are asking for your comeuppance.

Business bills that you pay with a personal check or credit card instantly become your personal responsibility if your company can't pay. Tax deductions, especially in sensitive areas like travel and salaries paid to family members, might easily be lost. Even the future creditworthiness of your enterprise could be imperiled, because if you ever need outside capital, bankers and investors will want to see your books.

"It's bad business judgment," says David Nadler, a partner at Ballon, Stoll, Bader & Nadler, a Manhattan law firm that specializes in small business. He says that when business owners use their personal credit cards to pay bills, it signals "the business is not creditworthy, and the owner is almost in a panic and will use a credit card because it's the only means available to him."

SEPARATION TRANQUILITY. To be fair, not everyone can keep everything in neat compartments. A business that begins life at your kitchen table will usually operate out of your personal checking account for awhile. But it's smart to separate personal and business assets and liabilities as quickly as possible, says Joseph Unger, tax partner at M.R. Weiser & Co., an accounting firm in New York.

The main reason: You don't want the IRS second-guessing your decisions about what was a deductible business expense. By blurring the line between personal and business spending, you'll tilt the balance of power the IRS's way if you're questioned about judgment areas like travel and entertainment. "If you commingle everything, you're sacrificing deductions," Unger says.

Your privacy may be the next victim, since commingling invites IRS scrutiny of your personal spending habits and the compensation paid to family members. And if your company posts a loss, the IRS will raise the "hobby loss" flag, intended to prevent people from using the costs of their avocation from reducing taxes on earnings from their vocation. "The method you use to conduct business is important in establishing an activity is not a hobby," Unger says.

Others, such as a lender or an investment group, may take a similarly keen interest in what's personal and what's business. "If you lack complete and separate records for your business," says Unger, "it makes it much more difficult to establish what the results of your business are."

Even if you do survive all that, commingling means you'll spend more time wrestling with paperwork to sort out your finances -- and possibly pay more for bookkeeping and tax-preparation services.

COVER PERSONAL ASSETS. Liability is another good reason to keep home and office distinct on paper, whether or not they are. Take credit cards.

"First of all," says Nadler, "using a personal credit card makes you personally liable." It means that if the business goes under, even if it's not your fault, your personal wealth, possessions, and even your home might be up for grabs.

The usual rule in small-business lending is to secure a loan with business assets, without further claim on your own wealth. Although it's the norm for lenders to require personal guarantees from small-business borrowers, these can often be given in the form of liens on specific property, such as vehicles or computers. "It doesn't necessarily have to be a personal guarantee that would cover everything that you may own now or in the future," Nadler says. A credit-card obligation is exactly this kind of open-ended debt.

Beyond that, notes Nadler, there's a strong financial incentive to keep things separate because a business can usually get loans (unlike credit cards) at a lower rate than a consumer can. "It doesn't make sense to pay more," he says. True, you could face fees of several hundred dollars a year to open business accounts for checking, which sometimes are the quid pro quo demanded by a lender. But such fees are themselves deductible, and the mere evidence that you've paid them can help preserve other business deductions worth thousands more by showing that you run a business-like business. So take credit for showing enterprise. Just make sure you take it on the enterprise's charge card.
 

By Timothy Middleton in Short Hills, N.J.
timothy@middleton.net

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