Why is it important to keep business and personal finances separate? Many business owners struggle with this distinction. Using business money to pay for personal expenses or paying for business expenses on personal accounts can really hurt your business. Here are 3 reasons why:
This is particularly true if you are making a lot of personal purchases with business money. I’ve had clients before that struggled to understand why they were showing that they made a profit, but didn’t feel it in their bank balance. This is because personal purchases are not tax-deductible expenses that would show up in a Profit & Loss report. Instead, they end up on the balance sheet as part of your distributions or draws. They also count against how much you can take out of the business if you are being taxed as a corporation. So, basically, you are taking money out of the business bank account without it actually helping the business and essentially hurting it because if you take out too much, you may not be able to pay major expenses like payroll.
Tax deductions & benefits
Now on the other side of things, if you are making a lot of business purchases on personal accounts, then you are probably not getting the tax deductions that your business deserves. There are ways to include it in your bookkeeping, but it requires a journal entry which the average business owner doesn’t know how to do. For either situation, you are creating a great deal of extra work for your bookkeeper or CPA and that is also costing your business more.
Keeping your business assets separate from your personal finances can also help protect you in the case of any legal actions. You never want to think about the business falling on hard times either, but in worst case scenarios you’ll want your personal assets to remain safe. This is also something to consider when setting up or changing your business structure, as some have more protections than others. Also, think about maintaining separate agreements and using your business name on documents like lease agreements or supplier contracts. This can also help when shopping for appropriate insurance coverage.
It may seem simple, but taking these extra steps and being mindful of what accounts you are using to purchase items, can really save you some money and hassle in the long run. If you’re looking to make a change in the new year and are looking for advice, schedule a discovery call with me.