Importance of Separating Business and Personal Finances
November 7, 2020 | Posted in Book Keeping
If you are starting a business, there are all kinds of tasks that go along with trying to gain exposure for your product or service. When should you get incorporated? When should you move from your home to an office or retail location? When should you begin hiring employees? As the initial dream begins to become overwhelming and you need to simplify things, a good place to start is at the bank.
As your company begins to grow, it is important to separate your personal finances from your business finances. The first step is to open a business checking account that will be designated for business use only. While it may seem insignificant to have a few personal transactions in your business account, it will eventually become a mess. Defining those boundaries early on will help the financial record keeping process tremendously. Having clear records will help you know where your business stands at a quick glance, instead of going through bank statements trying to figure out which transactions are personal and which are business-related.
Aside from simplifying record management, separating your business banking will make your relationship with the government less stressful. If you are incorporated, you need to have a business bank account already. If you get audited, the process will be much more pleasant. You probably don’t want the IRS going through your personal finances along with your business records.
Another danger of having your personal and business banking combined involves business debt. If your company accumulates debt and folds, you could be personally liable for what is owed if you haven’t kept clear records of your business being a separate entity.
Being audited by the IRS and chased by debt collectors are scary possibilities in any scenario. But, the real reason you should be diligent about your financial records coincides with the reason you started your business in the first place; to grow and be successful. Having a strong bookkeeping foundation will help you have a clear picture on how the business is running and how you need to react when important financial decisions need to be made.