As a business owner, blurring the lines between business and leisure isn’t a good idea. But as you navigate business finances, it’s tempting to use personal finances to help when your company needs a boost. This isn’t usually a good solution in the long run, though.
Having separate business and personal accounts allows you to treat your company as the independent entity it is. This protects your personal finances.
One of the most important aspects of running a successful business is keeping accurate records of your income and expenses. This is the only way to enhance your business’s performance. Thus, keeping your business finances separate from personal finances is crucial. In fact, grave complications can occur if you do otherwise.
Why It’s Essential to Separate Your Business Finances
- For Tax Reduction Purposes
Separating business and personal finances can help you with your taxes, because doing so makes it easier to provide accurate records of your business finances. This will also help you when you’re filing your taxes, especially the taxes on your company.
If you pay your business expenses using your business account, then some of these expenses can help reduce the tax you should pay. Deductible business expenses include advertising costs, business rent, telephone charges, contractors, etc.
Also, there are business expenses that can’t reduce the amount of tax. These are called non-deductible business expenses. They include salaries, medical fees, donations, etc.
Keeping receipts and invoices can help you monitor payments. And you can use your invoices and receipts to support your claims to get tax deductions.
- For Easier Accounting
Sorting out income expenses, assets, and receipts after they get mixed up is time-consuming. You have to worry about every quarter when it’s time to file business taxes. Also, mixing your personal and business finances makes it hard to know your revenue and expenses.
But maintaining a strong separation from the beginning will make it easier for you and your accountant. If you need to get information on your business income or expenses for a particular month, you can easily get this information within a few minutes.
Separating business and personal finances streamline your tax filing process. This also makes it easier for you to get better visibility into your business’s cash flow.
- Improves Your Credit Score
Your business and personal credit can significantly affect each other. For instance, some business owners leverage their strong personal FICO score to finance operations or cover business expenses. Using personal credit to boost your business opens the lines of credit, especially if you have no commercial accounts. This makes you responsible for any debt in your company.
If you take out a lot of personal loans for your business, you’ll run into financial trouble. And this may negatively impact your credit score. Because for every additional loan, you’ll have another “hard pull” on your credit, and these add up. Your FICO score will take a hit, which can affect your insurance rates and your ability to get more credit in the future.
A common tactic some business owners use is to have a personal guarantee on the first few business lines of credit. After establishing your creditworthiness as a business, you can focus on solely building up your financial options via your business.
- For Auditing Reasons
Having separate personal and business accounts can save you time and headache if and when the government audits your business. Because if you have separate accounts for personal and business finances, it’s easier to comply with the guidelines.
Remember, auditors will look at the supporting documents, tax returns, financial reports, and much more. It will be easier for you to provide the expenses that relate to your business if you keep personal and business finances separate.
Besides, having separate accounts for your business and personal finances keeps you from using your business account to pay for personal expenses.
Do You Want to Grow Your Business?
If you want to grow your business and you need the capital to make this happen, you may need to take out a business loan. But for this to happen, you have to show the bank or the moneylender that you have a sustainable income. So, it’s vital to keep your personal and business finances separate. The bank or the moneylender will only look at your business credit, financial income, and records.