It can be difficult to understand why you should separate your business and personal finances when it's easy to think of it all as “your money”. The truth is much more convoluted than that.
Mixing your business and personal accounts can be a recipe for disaster. Your business belongs to you, but it is a completely separate entity when it comes to your finances.
Below are 3 good reasons why you need to separate your personal and business finances.
Simplicity
I'm all about future-me. I like to give that girl every advantage that I can to ensure her success. That includes taking on an annoying task now, like setting up a business account, to make sure that she has less work to do in the future.
Keeping up to date with the bookkeeping for your business is difficult enough. There's no reason to make it more difficult on yourself
Combining your business transactions with your personal increases your workload and the likelihood of mistakes. It forces you to comb through all the transactions to remove personal transactions when most accounting software is not set-up for this function.
It's an easy way to miss transactions and let important expenses fall through the cracks. Keeping your bookkeeping accurate is the best way to make informed decisions for your business, so simplifying the process is the best way to ensure that your financial data is correct.
Protection
One of the first steps of setting up your business is to register with the state/federal government with a formal business structure, like an LLC or corporation. One of the key benefits of these business structures is that the business owners are protected from personal liability for business debts.
If you're still mixing your accounts, you are at risk of losing this key protection.
Setting up a business structure that is separate from you means that if your business were to go bankrupt, the creditors can only go after assets that the company owns. Your personal assets are protected. However, if there is no clear delineation between your personal and business finances, then that important protection no longer applies.
The best way to ensure that you are receiving the protections that you've set up is to create a clear line between your personal and business expenses by setting up completely separate bank accounts and credit cards.
Professionalism
Paying vendors with checks from your personal accounts sends the wrong message. It indicates that you are not serious about the business.
Your business is not a hobby and it needs to be tracked accordingly. Running your business transactions through your personal account can make it seem that way to suppliers and customers.
Mixed accounts are also a red flag if you ever apply for financing or reach out to investors.They will need to review your books before making any commitments and they will not be impressed to see your personal transactions mixed in.
Running all your business transactions through your business accounts shows people that you are a serious business and worthy of their trust.
Getting your business set-up with a proper bank account is not very exciting. You will have to research which bank and credit card will fit your needs. Then you have to take the time to go to the bank and go through the paperwork with a banker.
It’s not a great way to spend any day; however, the benefits in this case far outweighs the annoyance. The consequences of mixing your personal and business bank accounts can be devastating in the wrong situation.
So protect yourself. Take the time to get your accounts set up correctly from the beginning and you can avoid a lot of issues and extra work in the future.
Are you falling behind on your bookkeeping? I can help!