As you make your way into the business world, it may be tempting to use your personal finances to help give your business a boost when it needs it, but this isn’t always the best solution. By separating your personal and business finances, this allows you to ensure that you treat your business like the independent entity that it is, while ensuring your personal finances stay safe and you don’t get caught up in any financial trouble that will affect your personal life.
So why is separating your business finances so important?
There are many benefits that come with keeping your personal and business finances separate, with two of the main reasons being that it allows you to draw a line in the sands of your finances. Not only is it good for tax purposes, but it is also handy when it comes to personal protection purposes.
Let’s talk taxes
Keeping track of all the taxes owned for your business (and what can be deducted) is much easier if you’ve kept your finances separate from your personal spending. When you’re spending money on office supplies or operational and inventory purposes, every receipt counts, And you don’t want to be searching through your grocery and clothes shopping receipts to find these. This is not only going to save you a lot of time, but also a lot of stress when tax time rolls around. Imagine the extra effort that will be taken if you have to sift through every single transaction, trying to remember what was personal and what was business-related that can be claimed. Separating the two completely eliminates this issue and will make your life (or your accountants) much simpler.
Personal security
While separating your personal and business finances is important and beneficial for tax reasons, we’d argue that more importantly, separating your personal finances is a good idea for the sake of your own personal security. Using your personal finances to back any entrepreneurial ventures you decide to take can be risky business, and this isn’t just from the initial financial gamble. No one wants to have to remortgage their home due to a business expense that could’ve been avoided by not using your own personal finances.
It’s not uncommon for an entrepreneur to end up signing leases, loans, and lines of credit with their own personal finance. While yes, sometimes it’s necessary – especially when you’re first beginning and don’t have established earnings and business credit ratings behind you. But it should always be your goal to avoid these personal guarantees as much as possible, the more your business grows.
Build a strong business credit which will in turn give lenders confidence in the fact that your business can be trusted to repay all debts.
Some Tips for Separating Your Personal and Business Finances
Now that we’ve talked about two of the most significant reasons as to why you should keep your business and personal finances separate, let’s talk about a few steps you can take to begin putting this plan into action.
Incorporating your business is an option
When you incorporate your business as either a C Corp, S Corp or LLC (limited liability corporation) this can provide tax benefits, but even more so, it helps to protect your personal assets if you set up and maintain your corporation properly. When you maintain a corporate structure, you are able to protect your personal assets from business debts, lawsuits and credits that may arise (another reason to not use your personal finances, as your personal assets will become the default on a debt that is owed, and that is the last thing you want)
If creating a successful business is something you’re serious about, incorporating it is a smart step to take.
Business Checking Account
We can’t stress this enough, business credit is a big deal. The fastest way to build your business credit is with a business credit card. Not only do they come with great perks such as building your business’s credit score and history, but a business card will also help you eliminate the need to use your personal card in your business, once again mixing personal and business finances.
Opening a business credit card is a quick and easy way to streamline your business’s finances. You may even be able to deduct card costs (we’re talking annual fees and interest here) if your card is used solely for business purchases (which we recommend, don’t buy family dinner on your business card and don’t buy a company laptop on your personal card) another reason not to mix the two,
Setting a budget.
We’ve all heard the word budgeting before, but let’s dive in a little deeper. Having a business credit card and a business bank account is a great start, but setting budgets is just as important, especially when it comes to keeping your spending in check. While it may not seem like setting a budget does much when it comes to separating your business and personal finances, in doing so you will be far less likely to need to dive into your personal finances, because you budgeted accordingly. While yes, emergency situations do arise and no matter how well you’ve planned your budget you may find yourself needing some extra financial help to get out of a sticky situation. But in saying this, creating a clear-cut budget to begin with highly reduces your risk of running into these issues, forcing you to use your personal finances when you shouldn’t have to.
While your business may be your baby and it isn’t unusual for a business owner to find themselves in a situation that may require them to dip into their personal finances to keep their business baby thriving.
While this may not be completely avoidable, putting the above-mentioned tips, tricks and strategies into place will put you on the right path to completely separating your personal and business finances, making life easier on yourself and lowering the risk of a potentially devastating outcome. To sum this article up, if you’re starting a business, you need a business bank account.