In most cases, mixing your professional and personal life is not advisable. Business is all about the bottom line, and your personal life is all about whatever you want it to be. Combining them muddies the waters, creating confusion and a potential conflict of interest that will end poorly.
This is undoubtedly true for finances.
A clear divide between your money and the businesses has real benefits and helps avoid common pitfalls. Even if you go into business by yourself as a sole proprietor, it makes sense to open a business account to better understand your cash flow. You don’t need employees and payroll to justify opening a business account.
Let’s take a closer look at the benefits:
#1. Simplified accounting
- What is your cash balance?
- How much money is owed to you?
- How much money do you owe?
These are all simplified questions when your business transactions are separate from your personal account. It’s nice not to have to search through personal transactions to learn about your business’s financial health.
What business checks did you write last month?
Give me 5 minutes. I have to scroll through these personal bills and amazon orders. Did I really spend that much ordering food last month?
Separating finances for your business and personal life just makes accounting so much easier. You get to see everything related to your company and better manage your finances from a single place.
Many people refuse to get business accounts due to the extra fees. But in the long run, it can actually end up saving you money. For example, if you need to hire an accountant, they’ll likely bill you by the hour. So having a nice and tidy business account for them to work through makes their job much easier, saving them time and you money.
#2. Tax Advantages
A big part of filing your business taxes is writing off expenses. You can save money against your tax bill from many purchases made for your company. Keeping separate and accurate finances saves time and makes the whole experience less stressful. When you have a nice clean business account showing all your payments, it can help you find all your relevant expenses.
Also, if the taxman comes calling to audit your business, it simplifies proving the legitimacy of your finances.
#3. Building good business credit
Credit makes the business world go round, and to maximize your company’s potential, you’ll need a good credit rating. Getting access to funds is vital for growth and having a high credit score is essential to access larger business loans or lines of credit.
It’s more difficult to show your income and establish business credit with combined personal and business finances. While your personal credit score will be a factor determining the availability of funds, it is critical you separate finances, establish your business as a separate entity, and begin to build its credit history. It also simplifies proving the viability and financial health of your company to creditors.
Being able to borrow funds means you can leverage credit to invest in your business and chase growth opportunities. Leverage means borrowing money to spend on your business with the hope that it will produce financial rewards outweighing the interest incurred. While it is a risk, it is an essential part of operations for many businesses, allowing them to create growth and boost profits beyond what would be capable without the additional capital.
#4. Business account benefits
Personal accounts are not designed for business use and lack the features needed to run a business in the modern world. Whether it is a checking, savings, debit, or credit card business account, they will likely come with additional features. These could include:
- Robust online payment options.
- Invoicing capabilities.
- Merchant services that offer purchase protection for customers.
- Additional access for trusted employees.
- A line of credit from the bank to invest in growth opportunities or overcome emergencies.
- Easy integration with third-party accounting software.
#5. Professional image
Separate finances convey a more professional image to clients and customers. You can apply for credit cards using your business name and begin to establish the financial identity of your company. Having clients write checks to your business and vendors invoice the business makes you look more professional than having funds move through your personal account. It proves this is not a side hustle or hobby. You mean business and should be treated as such.
Simple steps for separating your finances Steps you should take to separate your finances include:
- Choosing an appropriate business structure: Whether it be a sole proprietorship, partnership, limited company, or corporation, establishing the proper legal framework for your organization can help separate your finances and remove personal liability. If unsure which business structure to choose, it can be helpful to seek advice from an accountant or legal professional.
- Open a business account: The first step to separating your business finances is having an account where you can deposit company income and make payments. Take time to assess the options available and what your business will need in the future.
- Get a business credit card: Next, open a business credit card and start building a positive credit history.
- Pay yourself a salary: Making salary payments from your business account to your personal account is an excellent way of separating your finances. Defining a salary for yourself instead of moving money around on an ad-hoc basis can help the business succeed and simplify budgeting.
Setting yourself up for success
It’s always beneficial to separate business finances from your personal, no matter your circumstances. The fees you have to pay are tiny compared to the time saved organizing your accounts, quickly finding expenses for tax purposes, and proving your company’s health to get credit and grow your business.
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