If you are a business owner, it’s important to remember that your company is an independent entity; it’s free-standing from you and your personal finances.
As such, separating your personal and business finances can help ensure you treat your business like the independent entity it is while safeguarding your personal finances.
Why You should keep them separate
It may seem apparent, but there are several reasons to be proactive about separating business and personal finances.
The following breaks down some of the more important reasons why you should consider doing so yourself.
Tax Reasons: One of the major reasons to separate your personal and business finances is for tax purposes.
The ability to take advantage of tax deductions — including writing off business expenses — is a huge reason many business owners choose to split their personal and business finances.
Keeping accurate records of business expenses is vital when running a company, as the IRS is more likely to audit your business and deny deductions and businesses losses if you have no clear separation between business and personal expenses.
The IRS also puts the burden of proof on you to disclose your business expenses and income. Maintaining good records saves you from having to dig through a huge box of receipts to figure out which purchases were for business and which were for your personal expenses.
Personal Liability: Separating your personal and business finances is important for tax reasons, but perhaps equally important, is separating your personal finances for the sake of your personal security.
If you don’t treat your personal and business finances separately, the law won’t either.
This is known as “piercing the corporate veil” which means the courts will hold a business’s owners, members, or shareholders personally liable for business debts or legal judgments.
Business Credit: Another important reason to detach your personal and business finances is to build business credit.
The ability to obtain working capital for your business is often vital to growing it but many times business owners find themselves signing personal guarantees for leases, loans, and lines of credit because the business doesn’t have established credit.
The goal should be to avoid personal guarantees as much as possible because it means you would be personally responsible for any debt incurred by the business in the event it defaults.
How To keep them separate
Determine How To Structure Your Business: Deciding the legal structure for your business the most important step you can take in separating your finances.
Whether you’re operating as a sole proprietor, corporation or an LLC, the legal structure of your business will basically dictate everything from your risk and liability, to how the IRS will retrieve your business taxes.
In order to make the best decision, take the time to discuss your options with an attorney, CPA, and financial planner.
Maintain Separate Accounts: The ability to distinguish between personal and business finances is critically important.
Open a bank account for your business which will help differentiate between personal and business expenses. It will also help your case if the IRS ever questions the legitimacy of your business.
You’ll also want to get a separate credit card for the business. This will help streamline business finances and helps the business build credit.
Make sure you treat your business checking account and business credit card like it’s someone else’s. You’ll be less likely to raid it in times of need — or for personal use — if you consider it like you’re the employee of the business.
Pay Yourself A Salary: Another tip for keeping personal and business finances separated is by paying yourself.
Write yourself a check each month from your business checking account. Transfer this to your personal checking account, and then behave as you would if you were working for someone else.
Paying yourself a salary can help isolate the line between business and personal profits, instead of haphazardly pulling money from the business.
