Why You Need to Separate Your Business and Personal Finances

Why You Need to Separate Your Business and Personal Finances

April 1 2016

It's easy to start your business using your personal accounts, but as you grow it will be a recipe for disaster, especially at tax time. There's good reason that some of the most common advice you'll hear as an entrepreneur is to keep your personal and business finances separate.

Separating your personal and business finances saves you both time and money. It keeps your bookkeeping and accounting simple, whether you do it yourself or decide to outsource it. Bookkeepers aren't cheap (rightfully so) and if they need to spend hours going through a jumble of business and personal receipts, it'll cost you.

If you're an LLC or a corporation, you're required to keep your finances separate because you're a separate legal entity.

If you're a sole proprietor, your business is considered unincorporated, meaning there is no legal distinction between you and the business. Because all the profits and losses of the company are tied to you, it's even more important to separate your finances in case of an IRS audit. It also helps distinguish that your business is an actual business and not a hobby.

All entrepreneurs want to see their business grow, and sometimes to get there you might need some extra funds. When that time comes, you'll need to show your business has a credit history. By separating your business finances, your business builds credit for better borrowing power. 

How to separate your business and personal finances:

1. Open a business checking account 
Head to your bank or ask fellow business owners for recommendations. This account will be where you will deposit all the income and pay all the bills. Avoid using cash for purchases and use the debit card linked to this account instead. 

2. Get a business credit card
While qualifying for a business credit card can be difficult if you've just started your business, it can be done. An added bonus: if you end up with a balance on the card, you can deduct the accrued interest as a business expense.

3. Put yourself on the payroll
Writing yourself a monthly check from your business account not only makes it easier to set up a budget for your business, it keeps you from dipping into the business finances whenever you need some personal cash. Plus, it rewards you for the hard work you put into building your business.

4. Keep your business receipts separate from your personal receipts
Sorting through stacks of receipts is tedious and time-consuming. Nowadays there are numerous apps to help you organize receipts and with a smartphone, it's never been easier to snap a photo of a receipt and toss it. 

5. Set a budget for your business
One of the best ways to keep your separated finances separate is to create a budget for your business. If you follow it, you'll be less likely to dip into your personal accounts to cover shortfalls in the business. 

6. Set up a separate home office
If you work from home, set aside an area for your business and use it for business only. Without a set place to work, it's too easy to mix business and personal papers, receipts, and other important info. By having a sacred space from which to work, you'll save endless hours sorting paperwork. 

While it can seem a daunting task to make the separation, it can be done. Your accountant or outsourced CFO can be a great help in setting up your business for success. They've been through it themselves and have helped countless other business owners. 


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