You’ve heard it time and time again “don’t mix business with pleasure.” This saying is true not only in the general sense but also when dealing with your finances. Whether you’ve been in business for 1 year or 10 or more years, it is important to understand why and how to keep your business and personal finances separate while running your small business. Here is an article we found that will help you do just that.
New business owners may seek to keep things simple and co-mingle their business and personal finances. This is a BIG mistake. Here’s why, and what you can to do to appropriately separate your financial activities.
There are important financial, legal and tax reasons to separate your finances:
- Financial. It’s difficult to know how well your business is doing if you can’t easily eyeball a bank balance devoted to your company. You may run into cash flow problems using a single account for business and personal expenses. Also, having a separate credit card for the company helps to build business credit scores.
- Legal. If your business is a corporation or a limited liability company, you can lose the personal liability protection you sought by setting up such an entity by co-mingling your finances. The reason: If you don’t respect the separate legal status of the entity, creditors may not have to and can go after your personal assets to satisfy their claims. There’s a legal doctrine called “piercing the corporate veil,” which means courts can ignore your entity’s status for purposes of your personal liability for any claims against the business if you haven’t observed the formalities of a separate business entity.
- Tax. For federal income tax purpose, the law requires you to keep good books and records. This can only be done if you have a business bank account into which you deposit income and from which you pay expenses. A rookie mistake is thinking you can remember what expense is for business, such as a meal, when it comes time to prepare your tax return; you can’t — and it can cost you tax deductions!