Mixing business and personal finances may seem like a practical way to manage a new or growing venture. But this approach can quickly cause headaches for business owners. Having just one set of accounts means more exposure to risk. A financial issue at your business could impact your personal assets, and vice versa. Let’s look at some of the common issues that arise when mixing personal and business finances.
A Simple Start Can Lead to Major Problems Later On
When first starting out a new business, it seems easy to maintain your business expenses with your personal expenses. You can see all of the money coming in and going out in one place. That can save you valuable time, and make it easier to keep track of expenses. But this sense of ease can quickly fade away. Using personal accounts often leads to problems with reviewing expenses or just asking a customer for payment.
Bank transactions
Having all business and personal expenses in one place can quickly become confusing. When your bank transactions are co-mingled, you are then forced to categorize every purchase as either personal or business.
Taxes and missed deductions
Managing your personal and business taxes becomes much more difficult when you have to separate each and every transaction. It can also lead to missing out on business deductions that lower your tax bill. It also means more work for your accountant, as well as more money spent on that process. And if your business faces an audit from the IRS, there’s even more work to be done if you’re mixing personal and business finances.
Additionally, only businesses can deduct business expenses on their taxes. Expenses going through a personal account may indicate to the IRS your business is actually a hobby, which, if audited, can make it difficult for you to prove to the IRS you’re operating a business.
Client and vendor payments
A client might view writing a check or transferring funds to an account in your name instead of your company’s as a red flag. Using a business name for payments makes it clear that your enterprise stands on its own two legs. Same goes for any vendor payments – a lack of a professional account to make payments to indicates a lack of professionalism or legitimacy to others who do business with you.
Legal Problems that Stem from Mixing Personal and Business Finances
Paying taxes and dealing with audits are just a few of the issues businesses face that make the case for keeping personal and business accounts separate.
Legal distinctions
You may also have to maintain separate accounts depending on your company’s legal structure. For example, if your business is a corporation, it is a distinct legal entity from yourself. This means you must maintain separate accounts. Conversely, if you operate a sole proprietorship, there’s no legal distinction between your company and yourself. However, it’s still best to keep two sets of accounts.
Audits
Separate accounts make the process of tracking and sharing information easier when facing an audit or legal issue. In the event your business is audited, you’ll need to provide clear and detailed records of all your business expenses. Having your business account the same as your personal one makes an audit messy and difficult.
When Should I Open My Business Accounts?
The best time to set up separate business banking is when you first open your company. The second-best time is now. Check out local and online banks. See what they offer in terms of account types, fees, and interest rates before you make your decision.
If you mixed your personal and business finances in the past, you’ll still have to spend some extra time to sort through documents and separate income and spending in some situations. But you’ll certainly save plenty of time going forward.
Making Good Financial Choices for Your Company
Avoiding the temptation to mix personal and business finances is just one of many smart decisions you can make to better manage your company’s money. You’ll be able to easily maximize your tax deductions, navigate legal issues or IRS audits with ease, and better manage your expenses and cash flow as a business owner.
When your business needs an infusion of funds to fuel development or seize an opportunity, finding the right lending partner is also vital. At PrestaLoan, we pride ourselves on close relationships with all of our customers. That helps you secure the best type of loan for your unique needs.
Get in touch with us today to learn how we can help you continue to make good financial choices for your business that promote growth and stability.
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