To commingle is to mix or mingle a party’s money meant for a specific business purpose with funds that has no relation to the original funds.
For example, a broker, agent or middleman receives funds from a client and deposits it into his personal account for convenience.
This can present a case of conflict of interest.
Even if the broker has a track record of doing this for years and no funds has been lost during that time, there’s just something not quite right with a procedure like this.
Such practices are generally frowned upon, and in some industries, these actions are outright illegal.
While some people might find that there is seemingly nothing wrong with commingling, this is because they have not run into situations when this can be a problem.
Problems of commingling funds
The most basic issue that most people would immediately think about is that a broker might use the funds for own use and deplete the account when the client needs to use the money for it’s intended purpose.
But this would not be an operational problem as long as the holder of the money is ethical and has enough funds in the account when required.
Yet even if a broker has no ill intentions, this can present a critical problem that would be out of his control.
For example, if the deposit funds of 3 clients are kept in an agent’s personal account, and one of them suddenly goes bankrupt, then the money belonging to the other two clients would be entangled with the bankruptcy proceedings.
How does one trace the money that has been mingled with others?
The account might not just be frozen for a period of time, but by the time the creditors take legal action to recover their share, there might be nothing left for the other two clients who had done absolutely nothing wrong.
If one can appreciate how serious such circumstances are, then commingling should be absolutely avoided.
In court judgments concerning the fair distribution of commingled funds, 2 common methods distribution methods are often applied.
- First in first out (FIFO)
- Pari passu
When either of the two does not appear to be a fair settlement to the parties involved, maybe due to unique circumstances, the rolling charge method can also be ordered.
Common commingling
Despite the innate questions over commingling, some types of business operations find it so tempting to commingle funds out of convenience that they do it anyway.
One of the most common examples of commingling is with the security deposit collected by landlords when accepting new tenants for their property.
The security deposit can be a large sum of money and is not supposed to be used for any reason other than according to the terms agreed upon between the landlord and tenant.
Under normal circumstances, a tenant would be entitled to receive this money back at the end of the tenancy.
But because this money could be potentially held for a long time by the landlord without touching it in anyway, landlords often deposit it into their own personal bank accounts for safekeeping.
The risk to the tenant is that should the landlord go bankrupt, the security deposit might be gone. This is assuming the landlord has not already used the funds to repay his own debts.
Another industry where professionals can be tempted to commingle is in the legal profession.
Lawyer often hold money belong to their clients in conveyancing work. Depositing these monies into their personal account can being a lot of convenience, but it can get their practicing licenses suspended.
While the odds of an extraordinary event like bankruptcy is low, there is still a possibility nevertheless.
Business owners
Sole proprietors and those who are self-employed can often make commingling part of their daily operations.
While there is nothing wrong with this, they might find it problematic when preparing the accounts for calculating tax, measuring business performance, proving income when applying for loans, etc.
When the business owner is running a private limited company, then it is best to clearly separate business accounts and personal accounts.
Keeping in mind that detailed annual accounts has to be filed with authorities, it just doesn’t make sense to create such a mess with your accounts.
Putting your accountant under so much unnecessary stress is unwarranted.
Why would any business owner want to mix up business and personal transactions in the same statement?
It just makes operations and cash flow difficult to track, measure, and be improved upon.
In addition, it can present tax and legal challenges in the future.
If an investors wants to inject private equity funds into the company by buying a stake in it, such accounts can also make it difficult for the investors to evaluate just how financially strong the company really is.
