For new entrepreneurs, it sometimes never occurs to them to keep their finances separate, but mixing business and personal finances can often lead to confusion. Over a longer period of time, that lack of structure can lead to banking errors or worse. By looking at the advantages of maintaining separate accounts, it’s easier to understand why throwing everything together can spell disaster.
Accounting is Made Easier
One of the biggest reasons for separating your business finances from your personal income is to make accounting simpler and clearer. When it comes to your business, you will need a concise idea about what assets you have available on a day to day basis. If you throw your personal money into that mix, you may end up forfeiting your rent or your grocery money without even realizing it. Additionally, the fees charged to a business account are tax deductible, but there’s no way to claim these exemptions, if you’re just throwing everything into one personal account.
Speaking of Taxes
Whether you prepare your own taxes each year or employ a professional to do it for you, you’ll want to maintain accurate and easily discernible records. By mixing everything together in a single account, you, or your tax preparer, will have to go through the records transaction by transaction to determine which ones were business-related. This will frustrate your tax preparer and he may even refuse to work with you, but, more importantly, it may cause you to overlook important and costly deductions.
Personal Security Versus Business Liability
This factor is just as important as maintaining accurate tax records, if not more so. When you operate a business, your business is liable for repaying debts for loans, leases, and lines of credit. If you have never taken a business loan out before you are probably wondering where to find a business loan online. In the event that you cannot pay those debts, your business may be compelled to liquidate assets to cover what is owed. However, if you don’t keep personal income and finances separate, that money may also be used to cover the debt. In that case, your personal assets will likely not be protected and you can potentially lose everything.
Building Business Credit
If you’re not separating your accounts, you’re likely just using your personal checking account for everything. Another reason this is a mistake is that it’s not eligible for consideration, when applying for business credit. By maintaining a separate account for your business, you can begin to build your business’ credit rating, which may be beneficial down the road. You can start out with a small business credit card and use that to build up your company’s credit score over time.
Maintaining a Personal Budget
Many entrepreneurs keep a single account, because they don’t draw a salary from their business and just take money when they need it. This is also a mistake. Even if it’s minimal, you should be paying yourself a regular salary and deducting that from your business expenses. One reason for doing this is that it will help you maintain a steady income, while your business is struggling to gain headway. Secondly, this will help keep a clear record of your assets and liabilities, which is important to know on a daily basis and at tax time. Without this kind of division of finances, you may not know what your profits are and what you can afford to spend to resupply your inventory.
Maintaining separate finances is important for many reasons, but it all comes down to keeping clear and accurate records. By separating your finances into multiple accounts, you can know what assets you have at a glance. This helps in making better decisions for your business and for your personal life.