It can be difficult to think of the business that you own as an independent entity. But separating personal and business finances is key for entrepreneurs.
Let’s discuss the key reasons why it’s so important for small business owners to maintain this sharp distinction and offer some tips on how to do it.
Reason 1: Make tax time easier
This task is exponentially harder when you’ve been using one checking account for your groceries, home, and office expenses.
Maintaining separate bank and credit card accounts keeps everything organized. When it’s time to file your returns, it will be easy for you or your accountant to clearly identify all business income and expenses.
Reason 2: Better understand where your business stands
When your business expenses are mixed with your personal monthly expenses, it’s hard challenging to see a clear picture of your business’ finances.
Separating your finances can go a long way to better understand how much you’re spending on your business, what you’re spending it on, and, most importantly, where you could cut back.
Reason 3: Build your credit
Most small business owners typically rely on their personal credit and assets to fund their business.
The reason is simple: Banks won’t even think about granting a loan or credit to any person or entity that doesn’t have a credit history. When you open a business bank account and credit card, you’re taking a very important step toward building your business’ credit profile.
Using a business credit card wisely will help increase your business credit card limit. This, in turn, can help your business boost its borrowing power and get bigger business loans with lower rates down the road.
What’s more, a business credit card won’t always impact your personal credit score and, in some cases, the interest paid on a business credit card is deductible as a business expense.
Reason 4: For corporations and LLCs, it’s the law
If you’re a U.S.-based entrepreneur and form a corporation or LLC for your business, then you’ll need to keep your business and personal finances separate in order to stay on the right side of the law.
Here’s why: A corporation or LLC is considered a separate legal entity from the business owners. It’s this separation that may have compelled you to incorporate or form an LLC in the first place, as it helps minimize a business owner’s personal liability.
But since the corporation/LLC is a separate legal entity, it needs its own bank account, tax identifier number, etc. In fact, should your business ever be sued, the plaintiff may try to show that you’ve mixed your personal and business finances, thus try to come after your personal assets.
This post was originally published on the FreshBooks blog and has been revised for Ideas by We.