To Top

The Importance of Keeping Business And Personal Finances Separate

New business owners may want to keep things simple and to achieve the degree of simplicity they need. They may decide to co-mingle their business and personal finances. This is a mistake which must be avoided at all costs and business owners must make every attempt possible to appropriately separate their business and personal finances.

New business owners who are not aware of such matters must understand there are financial, legal and tax reasons which require them to keep their business and personal finances separate. The individual may consider this as an unwanted hassle they would rather be without. However, the authorities concerned will not be looking at the matter similarly and would want separate accounts for business and personal finances.

[su_quote class=”cust-pagination”]There are no secrets to success. It is the result of preparation, hard work, and learning from failure.

~Colin Powell [/su_quote]

How Can Businesses Separate Their Business And Personal Finances?

We have mentioned earlier the three reasons why business and personal finances should be separated. Let us now consider each of the reasons to understand how they can affect either the business or the owner if a bifurcation is not made from the very beginning.

Financial Reasons

Business owners will have difficulties in understanding whether their business is doing well or not if they are unable to view their bank balance separately. They may also have problems with cash flow if they are using a single account both for business and financial purposes. It will be beneficial for the business has a separate credit card of its own because it can help the company build up separate credit scores.

Legal Reasons

Businesses that have been set up as a corporation of a limited liability company stand to lose the personal liability production they had sought by creating a company of this type. Thi is because they have not separated business and personal finances. Businesses that do not respect the individual legal status of the entity are allowing creditors to go after their personal belongings if the business is unable to satisfy the claims made by them. The courts also have the authority to ignore the status of the business for purposes of personal liability. Because of claims made by anyone when the business owners have not exercised their right to separate business and personal finances.

Tax Reasons

Federal income tax requires businesses to maintain proper books and records for the business. Maintaining proper accounts without separating business and personal finances will not be easy. Especially when a single bank account is being used for both purposes. The business will need a separate account where income can be deposited and expenses paid from the account. Businesses can easily make mistakes and confuse expenses when preparing tax returns. The resultant effect will affect any tax deductions which the business may be entitled to and prove expensive for the business.

How to Separate Business And Personal Finances

Business owners are required to understand their personal finances have nothing to do with the business. A similar rule would apply to the business and therefore they must keep their business finances untangled from their personal finances. Separate accounts must be created regardless of whether it is with a bank, online payment getaways like PayPal and business credit cards.

An accounting system which is separate must also be maintained to record business expenses and income. Accounting systems used for personal finances should not be considered for the business.

[su_quote class=”cust-pagination”]The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency. Bill Gates [/su_quote]

~Bill Gates [/su_quote]

Business owners are required to understand that the tax authorities will not consider ignorance of the law as a mistake but will be trying to penalize the business even if minor errors are noticed. The objective of separating business and personal finances will be the responsibility of the business owners and it is a job which must be considered with the attention it deserves. Any mistakes committed in this regard will leave business owners trying to recoup for losses which they had incurred simply because they were ignorant and uncaring about separating business and personal finances.

More in Finance & Business

You must be logged in to post a comment Login