I know many of you do it. You’ve probably been told at least once already not to do it. But here it is one more time: don’t mix your personal and business spending in the same bank and credit card accounts.
For small business owners, maintaining a clear distinction between business and personal expenses is crucial. While using a single account for all transactions might seem convenient, this practice can lead to significant complications. Here are four reasons why small business owners should keep their business and personal expenses separate.
1. Simplified Bookkeeping
When business and personal expenses are mixed, bookkeeping becomes a bigger chore. No one likes more chores. Separating these expenses simplifies bookkeeping, making tracking and managing business finances easier and less prone to errors. If you only do your bookkeeping once a quarter or once a year – are you sure you’ll remember if that expense was business or personal? How much time will you waste trying to figure it out?
2. Tax Compliance
Maintaining separate accounts for business and personal expenses simplifies tax preparation and compliance. Mixing expenses will lead to mistakes in tax filings. Separate records make it easier to claim legitimate business deductions and provide clear documentation in case of an IRS audit. This is not something you want to make more complicated.
3. Professionalism and Credibility
Operating with separate accounts enhances the professionalism and credibility of your business. It shows that you are serious about managing your business finances properly. This professionalism is required when dealing with clients, investors, and lenders who expect a clear distinction between personal and business finances.
4. Legal Protection
Keeping personal and business expenses separate for business owners with limited liability entities (LLCs or corporations) is essential for maintaining limited liability protection. Mixing finances can lead to “piercing the corporate veil,” and you could be held personally liable for business debts and obligations.*
Please let this be the last time someone tells you to separate your business and personal spending. I know it won’t be. But remember, keeping expenses separate simplifies bookkeeping, ensures accurate financial statements, aids in tax compliance, enhances professionalism, and provides legal protection. By maintaining this separation, you can focus on your business’s financial health and growth – and less on the administrative minutiae you hate.
To learn more about creating and maintaining accurate financial records for your small business, click here to schedule a free consultation with Savvy Home Office Services.
*This information is not legal advice or a substitute for the advice or representation of a licensed attorney.