Why is it important to separate your business & personal accounts?
If you’re a first-time business owner, you’ll soon realize, if you haven’t already, that there’s a lot of information to take in, there are the dos and the don’ts and advice being thrown at you from every direction. Here’s a piece of advice that you should heed from the get-go – when it comes to your businesses finances, it’s crucial that you keep them well away from your personal finances. ‘Why is it important to separate personal and business finances?’ you ask… keeping them separated will not only make it crystal clear what’s going in and out of your business and greatly help you to measure business progress (or lack of), it’s also useful and comes alone with a whole host of benefits…
Benefits of separating personal and business expenses:
- Professionalism – having a business account is important for your professional image, people will take you and your business far more seriously.
- Tax benefits – yes, please! You don’t want to be missing out on any tax deductions including writing off business expenses. Make sure to keep records of what’s being spent where so you can claim those deductions and avoid the enormous headache that tax audits can cause if everything isn’t in tip-top shape.
- Increase business credit score – having a stronger credit score will help to increase your borrowing power and secure larger business loans. This may be the last thing on your mind right now, but you never know when you may need that helping hand or even a line of credit as a safety net to draw from in a time of need. If your business and personal finances are all muddled up, potential business lenders won’t look twice at you.
- Protect your personal assets – mingling your business finances with your personal finances can put your personal assets at risk of seizure should your company ever find itself in a lawsuit (which we certainly hope it doesn’t – don’t let it come to me).
How to separate your finances:
Now that you know why it’s so important to have good financial hygiene, it’s time to pull your finger out and raise a barrier between you and your business. Don’t fret, it is far easier than you may think. By now you’re probably wondering ‘how’ exactly. Entrepreneurs and business owners alike now’s the time to take notes. Here we give you some top tips on how to separate business and personal income to make this process as smooth and easy as possible for you:
Tip 1: Create a business account
The first thing you’ll need to do is create a business bank account. Really, it’s that simple. Having a separate business account will make that crucial divide between your personal and professional life allowing you to differentiate your business expenses. If the IRS (for those in the US) or Australian Taxation Office (for those down under) ever come knocking at your door, questioning the legitimacy of your business, you’ll have your separate business account to back your claims.
Tip 2: Get a business credit card
It’s all well and good creating a separate business account, but if you’re still popping your business expenses on a personal credit card then you’re defeating the object. Make sure that you isolate your company expenses onto a dedicated business credit card. There are many benefits of business credit cards, including, having the ability to increase your business credit score. Now, you may or may not already know this but, you will have a completely separate business credit score (one that differs from your personal credit score, that is) for all of your commercial operations. This is something extremely important for a business owner to build up and work on.
Building up your business credit score is fundamental if you want to take out business loans of any sort, as it will prove to potential future lenders that you are financially responsible. There are many credit cards out there offering 0% APR for the first 12-15 months that you can utilize when starting up a business.
Where to get a business credit card:
If you’re looking for a credit card of this kind, be sure to do your research and compare credit card offers on a reputable website.
Benefits & Disadvantages of Business Credit Cards
It’s important to weigh up the benefits and disadvantages of business credit cards before diving in to get one. Here we’ve summarized a few for you:
Tip 3: How to separate your finances if they’re mixed together
If you’re banging your head against the table thinking, ‘I wish I knew this when I started out’, don’t worry, you can still untangle the mess. If all of your personal and business finances are cosey with one another in the same account we recommend the following:
- Download your years’ worth of bank statements
- Display the numbers in an Excel file or clear formatting document
- Go through the statements marking personal and business transactions grouping them together
- Get your accountant to make adjustments to your tax return and bookkeeping file
It may take a little bit of time to sift through all of your transactions, but it is totally worth it in the end. The sooner you do it, the easier it’ll be. So get to and you can thank us later!
Tip 4: Separate your receipts
Now that you’ve (hopefully) separated your mixed finances, it’s time to continue on with this good practice. For all future transactions, make sure to separate your receipts and more importantly, don’t throw them away. Get yourself an old-school folder and divide it up into months making sure to have one folder for your personal receipts and one for business. This discipline will be sure to save yourself down the line as your company grows.
Tip 5: Know the difference between personal and business expense
Any expenditure that you can legally write off, should definitely be a high priority to be written off come tax time. If you use your mobile for both personal and business needs does that make it tax deductible? If 30% of your time on the phone is spent on business then you could actually deduct 30% of your phone bill. What about cars? You can see where we’re going with this. How many other expenditures could you be saving money on?
If you aren’t sure of what can and can’t be written off grab your tax advisor (if you don’t have one, you should) and make good use of them to figure out what’s deductible and how to best keep track of things.