Managing all the responsibilities that come with running a business can be difficult. You will have to look after your employees, secure the necessary partnerships and even try to develop your products correctly. However, the most important thing that some business owners overlook is the importance of keeping business finances separate from personal finances.
As a new business owner, you may not understand why it is so important to keep these two financial positions separate. To help you better understand why it is important to separate these two financial positions, here are some reasons why.
Easier record keeping
One of the more obvious reasons you may want to separate the two types of finances is the amount of time it can save you. Having to dig up business expenses for personal business expenses and vice versa can be stressful and time consuming. So why not keep two separate records instead. Although it may seem more complicated at first glance, it can be a lifesaver in certain situations.
In addition, being able to track your business finances independently is something you may take for granted. You can easily check the financial position of your business and check for any anomalies. It is important to keep different records, so much so that any accountant you work with will give you the same advice.
Separate liability
One of the main reasons why you should keep your business and personal finances separate is for liability reasons. In short, intertwined finances mean that it is impossible to separate your business from you. Therefore, you, the business owner, and your citizens are one and the same in terms of responsibility.
For example, your business may be hit by a lawsuit, which is common in most businesses. If you do not keep your business separate from your personal finances, then you will have to pay damages from both ends.
Another important example to look out for is when your company is unable to service its debts. According to CIBinsights, 38% of businesses fail because they are unable to raise new capital or run out of cash. Now, if your company is a limited liability company, then you should be fine. The only issue that may affect you is if you have not separated your business responsibilities from yourself. If the two financial situations are the same, you will also have to pay these debts yourself.
Finally, if your company has to file for bankruptcy and your finances are not separate, then your personal assets are also at risk. However, if you manage to keep them separate, you will not have to worry about bankruptcy affecting your personal assets.
Open the door to loans
When you have separate business and personal finance accounts, you will be able to access different types of loans. In some cases it can be very difficult to obtain a business loan from a bank if you do not have a separate business account. If you try to get a larger business loan without a business account then the bank will turn you down almost every time.
In addition, when applying for a business loan, homeowners must provide their business and personal tax returns to the bank. Only after the bank is able to assess your liability and ability to pay will they be willing to offer you a loan. Without a dedicated business account, they will not have a good idea of the financial factors that make you more attractive to lenders. For example, your ability to pay off existing credit card debts may be a decisive factor when considering a loan.
Tax implications
When it comes to your business needing a proper tax return, separating the two finances can also be beneficial for your taxes. As the owner, you will be able to deduct various expenses that your business may incur. therese can include supplies needed for surgery, or even travel-related expenses. But you cannot claim these deductions: you will need the correct paperwork, which will only come with a dedicated account.
When the IRS audits a business, they will investigate its expenses to see if they relate to the business. By using a separate business account, you will be able to leave a clear written record of all transactions. This can make the IRS audit process easier and ensure you receive tax benefits。
Tips when separating business and personal finances
Keeping your business and personal finances separate is often as simple as opening a separate bank account. We’ve already looked at all the benefits that come with a dedicated business account. Here are some tips to help with the separation.
Apply for a Business Credit Card
Business credit is also essential and the fastest way to establish it is through a dedicated credit card. You will be able to build up a credit history for your business, which can make it seem more legitimate. A business credit card also means you don’t have to use your personal card to pay for your business.
Consider consolidating your business
Merging your business can provide a variety of tax benefits. It can also protect your personal assets if your business files for bankruptcy. Incorporation can also protect you from factors such as litigation, debt and loss of business. However, this may not be the case if you have signed a personal guarantee.
Setting the right budget
After setting up your merchant account and bank card, you may wish to continue setting up a budget. You will be able to control all your business expenses with a budget and you will know what not to exceed when spending.
Final thoughts
Owning a business can be an exciting adventure. But as you have just seen, not separating your business from your personal finances can lead to very serious problems. So even if you only want to pay off your existing credit card debt through your business, be sure to consult an advisor.
