There are tax reasons, legal reasons and business reasons why it makes sense to keep your business and personal finances separate. It’s not difficult and could in and of itself save you money. People who don’t keep their finances separate eventually will have to anyway; so why not save yourself the headache and do it now?
Here are a few important reasons why you should keep your finances separate.
=> Tax Reasons
The first and most common reason is taxes.
For one, if you’re keeping your business expenses in your own IRS filings, you’re more likely to get audited, according to IRS statistics.
You’re also likely to have a much more annoyed accountant who has to do a lot more work to sort out your various expenses at the end of the year. You can be sure that’s going to cost you a bigger accounting bill.
It also makes it a lot harder for you personally to keep track of things. If you’re blurring the line on your personal and business finances, it makes it very hard to know exactly how your business and you personally are performing financially.
Finally, you’ll likely miss write-offs. When you treat your business as a business, there are many things you can write off that you couldn’t if you treated your business as a hobby.
In short, by keeping your business and personal expenses separate, you’ll save both time and energy in tax keeping. In the off chance that you’re audited, you’ll have everything in order for the IRS as well.
=> Legal Reasons
One of the most important reasons for filing for an LLC, S-Corp or C-Corp is legal protection. If your product somehow harms a consumer, or your competitor decides to sue you, you’re only liable to the extent that your corporation can pay and not personally liable.
However, if you mix your personal and business finances, that can be grounds for a lawyer to say that your corporation isn’t truly a corporation. They can attempt to “pierce the corporate veil” – that is to say that you and your corporation aren’t truly separate.
In other words, by mixing your finances, you risk being personally liable for your corporation’s mistakes.
=> Business Reasons
There are many good business reasons to keep your personal and business account separate. Here are two.
First of all, if you don’t then it makes getting investment or getting a line of credit practically impossible. After all, how can you prove your earnings if it’s all mixed up with your personal expenses? Who would invest in or lend to a “company” that wasn’t really a company?
Second, you personally will treat your business very differently when it’s run as an outside business. Most people find that they treat their businesses much more professionally when it’s an outside entity, as opposed to an extension of their personal finances.
We’ve just touched on several tax, legal and business reasons on why you should keep your business and personal finances separate. The process isn’t difficult or expensive; all it requires is a new bank account and debit card. Why not begin the process today?
