Why Keep Personal and Business Finances Separate from Each Other?

If you happen to be in start-up mode you probably haven’t given much attention to the importance of keeping your personal and business finances separate from each other. This blog is certainly not limited just to start-ups, but also includes ill-informed businesses that are beyond the start-up phase of maturity.

Keeping your personal and business finances separate is more than just a “nice thing.” Experience has shown how messy it is to unravel co-mingled finances when forced to do so to satisfy legal requirements such as preparing your tax return or when the IRS comes knocking on the door to do an audit or when lenders request financial reports before approving any cash infusion that you need for your business to survive.

Furthermore, you may have to provide evidence to the IRS that your business is not a sham but is indeed a credible, ongoing concern. Co-mingled finances only go to show a lack of credibility that the numbers you report “might” be inaccurate.

Not a good thing.

The following items describe some of the things that you, the business owner, can do to help present your business in the most credible and  favorable light.

The first two points, as neatly summed up by American Express, touch on checking accounts and credit card strategy:

1. Set up separate checking accounts. If you have separate checking accounts and you are diligent about drawing on the right account at the right time, come tax time, all you have to do is review your bank statements for a clear picture. If you can manage to only use your business debit card and avoid cash, you may even be able to do your taxes and other financial reporting straight off your bank statements.
2. Get a credit card for the business. A business credit card will help you build up a credit history for your business separate from your personal credit history. More importantly, your credit card is one of the likeliest places for your finances to get muddled. Separate credit cards means that even if there's something a little out of reach of your business' current budget, you won't be tempted to use your own credit card.
3. Keep your accountant informed. Quickbooks recommends the following: ask your accountant about making quarterly estimated tax payments to the IRS and your state treasury. If you do end up mixing personal and business finances, such as using your personal funds to invest in your company or purchase something for your company, always ask your accountant how to record the investment in your bookkeeping program.
4. Use accounting software. As noted by WAHM, one of the most important reasons to use accounting software in your small home business (any business for that matter) is to help keep separate business and personal finances for tax purposes. When you work at home and report your own income to the IRS, statistically, there is a higher chance of audit. Completely separating the income will help you when filing your taxes, so as to prevent any issues if an audit arises.

Conclusion

Besides reducing legal liability, as Fund Box recommends, keeping your business finances separate makes recordkeeping easier, which helps you manage your taxes and business bills more efficiently. And if you need additional help, the IRS website has hundreds of resources explaining what business and personal records you should keep, how long you should keep them, what forms you need to file and more.