While using a business credit card to pay for your family vacation might seem practical, the consequences vary depending on whether your business is structured as a sole proprietorship or a limited liability company.
Generally, company funds should only be used for business-related expenses, which are defined as expenditures necessary for conducting business activities.
Tax consultant Zvezdana Pisarević explains to Biznis.rs that business expenses include all costs required for a company to operate effectively. The Accounting Law defines expenses as “any expenditures that serve to maintain revenue,” meaning that any essential costs for the company’s functioning are considered business expenses.
- These primarily include employee salaries, production materials, and the cost of purchasing goods for resale. Expenses can also include material costs, such as fuel, office supplies, rent, and maintenance of assets, as well as intangible costs like commissions, interest, consulting, and other services – Pisarević elaborates.
A business card can be used to cover costs like a meal at a restaurant, cleaning supplies for office maintenance, or office equipment. However, it should not be used for personal items such as children’s toys, newspapers, cigarettes, personal footwear (unless it’s work-related), perfumes, makeup, or clothing for personal use.
As a sole proprietor is considered an individual conducting a business, they are personally liable for all business obligations. Thus, integrating personal assets into business records and using business funds for personal needs is allowed, provided certain rules are followed.
This means that a sole proprietor who maintains business records can use a business card for personal expenses, but these should not be recorded as business expenses.
For a limited liability company, the scenario is different. The Law on Business Companies prohibits the use of company funds by the founder as personal funds.
- In practice, it sometimes happens that personal expenses are paid with a business card, either due to using the wrong card or misunderstanding the rules. I’ve often had to explain to company founders that the company is a separate legal entity and not their personal property. The founder, as an individual, manages the company and has the right to withdraw profits the company earns from its business activities – says tax consultant Zvezdana Pisarević.
She mentions that if a personal expense is paid with a business card, and it is not for business purposes, there are several options available.
One option is to treat such expenses as dividends, meaning they are considered profit withdrawals, and pay taxes on dividends if the expense was incurred by the company’s founder.
Another way to resolve this issue is to classify the expense as a personal expense of the employee and deduct the amount from their salary, as with any other salary deduction.
- In this case, it is necessary to obtain the employee’s consent to deduct the amount from their salary, even if the founder is employed by their own company, usually in the role of a director. This is defined by Article 123 of the Labor Law, which allows the employer to recover monetary claims from the employee by deducting them from their salary, among other things, only with the employee’s consent. If the founder is employed in their own company, they are treated like any other employee – Pisarević explains.
