Why Separating Personal and Business Finances is Crucial?
When onboarding new clients, one of the first things I discuss is whether they have separate personal and business finances. If they don't, I strongly encourage them making the change immediately.
I'm giving you the same advice, please separate your finances.
Even if you’re diligent about tracking expenses, this advice still applies.
Here’s Why:
Accurate Bookkeeping
Assess Performance
Clear Audit Trail
Tax Savings
Creditbility
Protection
Bank Policies
Funding Opportunities
Accurate Bookkeeping
Keeping personal and business funds separate simplifies your bookkeeping exponentially. When your bank account is exclusively for business, it eliminates a lot of stress and confusion. Mixing funds makes tax season a nightmare, as you'll have to sift through transactions to determine which are business-related. Save yourself the headache by opening a business checking account now, and avoid hours of sorting through finances later.
Assess Performance
Even if you meticulously track expenses, having separate accounts offers distinct advantages:
Clear Financial Picture: You can easily see your business performance at a glance.
Profit and Loss Insights: Run monthly reports to understand your actual earnings.
Budget Management: Ensure you have funds for business expenses without jeopardizing personal needs.
Trend Analysis: Identify which products or services are performing well and which need adjustment.
With a dedicated business account, you can track income and expenses more accurately.
Clear Audit Trail
During an audit, the IRS checks for accuracy between reported income and actual financial activity. While you're not legally required to follow a specific record-keeping method, having a separate business account makes things easier. Your bank statement will clearly show business transactions, simplifying the audit process. Moreover, it helps your business appear legitimate to the IRS, ensuring you qualify for deductions and avoid scrutiny.
Tax Savings
Commingling funds often leads to overlooked expenses. With numerous transactions, distinguishing personal from business expenses becomes challenging. For instance, can you remember which Walmart, Target, or Amazon purchases were business-related? Keeping these expenses clear can result in significant tax savings. Don’t miss out on deductions you're entitled to because of poor record-keeping.
Credibility
Having a business bank account enhances your professionalism. Asking clients to write checks to your personal account looks unprofessional and might make them reconsider working with you. A business account reassures clients of your legitimacy. Plus, treating your business professionally encourages others to do the same.
Protection
If you operate as an LLC or Corporation, you must treat your business as a separate entity. Failing to do so—known as "piercing the veil"—can nullify your LLC protection. Keep personal and business assets separate to maintain your legal protections.
Bank Policies
Using a personal account for business might violate your bank’s terms. Banks typically require personal accounts to be used for personal transactions only. Violating these terms can result in account closure.
Funding Opportunities
A business bank account is essential for qualifying for loans or grants. Government stimulus funds and business credit cards require a business account. It’s a critical step in verifying your business’s legitimacy for financial opportunities.
Next Move!
The message is clear: Do not commingle funds. If you haven’t already, open a business checking and savings account now. Many banks offer online applications, so you can do it from home. If your bank doesn’t, consider online banks like Azlo, which offer business accounts with no fees.
For those who already have a business account, consider opening a business credit card to further professionalize your financial management.
Make the change today for a more organized, credible, and protected business future!
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