It can be difficult to manage all of the responsibilities that come with running a business. You will have to look after your employees, secure necessary partnerships, and even work on developing your product correctly. But the most important thing that some business owners overlook is the importance of separating your business finances from your personal finances.
As a new business owner, you might not understand why keeping both of these finances separate are so important. To help you better understand why keeping both of these finances apart is important, here are a few reasons.
Easier to Keep Records
One of the more obvious reasons why you would want to keep both types of finances apart is that it can save you a lot of time. Having to dig through your business expenses for personal ones or vice versa can be stressful and time-consuming. So instead of doing this, why not just keep two different records. Even though it might seem more complicated at first, it can be a lifesaver in certain situations.
Furthermore, being able to track your business finances independently is something that you may take for granted. You can easily check up on how well your business is doing financially, as well as check up on any abnormalities. Keeping different records is so important that any accountant you work with will give you the same advice.
One of the major reasons you should keep your business and personal finances separate is for liability reasons. Simply put, intertwined finances mean that there is no way to differentiate your business from you. So the business owner you, and the citizen you, are the same person in terms of liability.
For example, your business might be hit with a lawsuit, which is a common occurrence in most businesses. If you did not separate your business from your personal finances, then you will have to pay damages from both ends.
Another important example worth looking at is when your company is unable to pay off its debt. According to CIBinsights, 38% of businesses fail because they are unable to raise new funds or run out of cash. Now, if your company is one with limited liability, then you should be fine. The only problem that could possibly affect you is if you have not separated the liability of your business from yourself. If both finances are one and the same, you will have to personally pay off those debts as well.
Finally, if your company has to claim bankruptcy and your finances are not separate, then your personal assets are in danger as well. But if you manage to separate them both, you will not have to worry about a bankruptcy affecting your personal assets.
Opens Doors to Lending
When you have separate accounts for business and personal finances, you will be able to take out different types of loans. In some cases, obtaining business loans from banks can be very difficult if you do not have a separate business account. And if you try to get a larger business loan without a business account, then the bank will reject you almost every time.
Furthermore, when applying for business loans, owners will have to give the bank their business and personal tax returns. Only after the bank is able to evaluate your liability and ability to pay will they be willing to offer you the loan. And without a dedicated business account, they will not be able to get a good read on financial factors that make you more appealing to lenders. For example, your ability to pay off existing credit card debt can be a determining factor when consider you for a loan.
Speaking of your business needing proper tax return forms, separating both finances from each other can also be beneficial for your taxes. As an owner, you will be able to deduct various expenses that your business may incur. Therese can include supplies necessary for the operation or even travel-related expenses. But you cannot claim these deductions: you will need the right paperwork, which will only come with a dedicated account.
When the IRS audits a business, they will look into its expenses to see if they relate to the business or not. With a separate business account, you will be able to leave a clear paper trail for all of the transactions made. This can make the auditing process much easier for the IRS, ensuring you receive the tax benefits.
Tips for when you Separate Business and Personal Finances
Separating your business and personal finances is usually as simple as opening a separate bank account. We have already looked at all of 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 to have, and the fastest way to build it is through a dedicated credit card. You will be able to build a credit history for your business, which can make it look more legitimate. A business credit card also means that you will not have to use your personal card for business expenses.
Consider incorporating your business
Incorporating your business can provide a multitude of tax benefits. It can also protect your personal assets in the event that your business files for bankruptcy. An incorporated business will also be able to protect you from things like lawsuits, debts, and losses incurred on the business. But that might not be the case if you have signed a personal guarantee.
Set the Right Budget
With your business account and card set up, you might want to move on to setting a budget. You will be able to keep all of your business expenses in check with a budget, and you will know what not to surpass when spending.
Owning a business can be an exciting venture. But as you have just seen, not separating your business and personal finances can lead to very serious problems. So even if you just want to pay off existing credit card debt through your business, be sure to consult an advisor.