Failing to thoroughly separate personal and professional finances is one of the most common financial planning mistakes small business owners make. Keeping business-related accounts, lines of credit, records, expenses, and expenditures separate is essential. Many new entrepreneurs—especially those operating as a sole proprietor—don’t fully appreciate why you should separate personal and business finances, though. So, we’d like to cover a few of the more important, compelling reasons.
Reasons Why You Should Separate Personal and Business Finances
- It greatly simplifies things at tax time. If you mingle personal and business finances, it’s guaranteed to create complications and headaches when it’s time to file your business taxes. At the very least, you’ll have to wade through bank and credit card statements when trying to figure out your business expenses. Depending on what your personal and professional spending look like, this could add many hours or even a day or more of work to the process.
- It saves you money at tax time, too. If you’re using a professional tax preparer for your business taxes, those extra hours of work mentioned above will mean a higher bill for the service. The simpler and more straightforward your records and information, the more efficiently your tax preparer can complete your return. So, another good reason why you should separate personal and business finances is just to help keep your accounting budget in check.
- It helps you build business credit. It’s important to start establishing business credit for your small business, separate from your personal credit history and score. This will help you secure all types of lines of credit for your company over time. Having things like an employer identification number (EIN), business bank account, and business credit card are basic parts of separating your personal and business finances, and of establishing business credit history.
- It gives you more legitimacy. This is a particularly compelling reason why you should separate personal and business finances as a startup and in the early years. To make and receive payments, you’ll have to provide financial and account information to clients, vendors, partners, etc. Having a business account looks more professional and business savvy, and it fosters trust. But if it’s a personal account, people can get nervous and even consider it a red flag.
- It protects you from certain liability. If you formed an LLC, S-corp, C-corp, or other entity, you’ve protected yourself against certain liability that can arise in the course of doing business. However, if you mingle your personal and professional finances, you can invalidate some of the protections you would otherwise have. This is known as “piercing the corporate veil,” and it can leave you personally vulnerable to liability, putting your personal finances, assets, and credit history in jeopardy.
