Entrepreneurs, freelancers, small business owners, and even the executives of massive companies all eventually learn one important lesson: it’s wiser to keep one’s business and personal finance separate than it is to use a single bank account for all your transactions.
Why? Turns out, this nugget of wisdom hasn’t persisted for decades because of one single reason. Instead, there are lots of benefits to keeping your business and personal accounts separate.
For starters, you can only take advantage of certain tax breaks and other benefits if you keep your business and personal finance separate. Like writing off expensive business expenses, certain tax deductions are only possible if you have a distinct bank account and financial records to point to come tax time.
Of course, keeping tight books overall is very important in general. But if the IRS ever audits you and you took one or more tax breaks for your business, it’ll be easier to prove that your deduction was legitimate if you have your personal finances cleanly separated from your business records.
Build Business Credit
Both personal and business credit scores are important for our financial flexibility. But if you want to improve your business credit score over time, keeping your personal finances separate is the way to go.
Your business credit score can be improved by paying off business debts or loans on time, running your business successfully, keeping detailed records, and paying your taxes correctly. If your business and personal funds are mixed, it’s more difficult to prove your business income to banking agencies and credit bureaus. This, in turn, makes it harder to establish and grow business credit.
You’ll need high business credit if you want to be approved for business loans or to secure financing for your entrepreneurial endeavors in the future.
Limit Your Personal Liability
As another perk, keeping your business and personal funds separate will help to limit your personal liability if your company ever comes under fire for one reason or another. This is especially true for LLCs or limited liability companies, but it applies to any business organization.
Say that you’re sued because of an unhappy client or customer. If they are kept separate, your personal finances will not necessarily be on the hook for repaying any debts or costs for faulty products or any other court-ordered charges. By keeping your personal finances separate from your business finances, you may be able to prevent yourself from falling into financial ruin.
Make Accounting Easier
Lastly, keeping separate finances for business and personal expenses will make things a lot easier for your accountant or for yourself! Running clean, organized books is vital if you want to track your yearly expenditures, plan for next year’s budget, and spot new ways where you can save money.
Bottom line: separate your business and personal money as early as possible, preferably from your business’s launch onward. You’ll thank yourself later when you save yourself tons of headaches!