You may be the main person responsible for handling your small business's expenses, especially during the startup stage. That does not mean you should be using your personal accounts for business transactions. Keeping your expenses separate is an important step in protecting both yourself and your business.
Why Keep Personal and Business Expenses Separate?
Keeping your personal and business expenses separate isn’t just useful for when you file your taxes. It also protects you from liabilities and gives you the advantages many business accounts offer.
Protect Your Business from Various Liabilities
Your customers have certain expectations when it comes to getting the product or service they paid for, and you are responsible for making sure your rent and other payments to various lenders are paid on time. Customers may also have safety or privacy concerns, and it is important to make sure that only your business — not you as an individual — will be held liable.
Even the most carefully managed businesses can experience problems. Faulty products, employee mistakes, defaulting on loans, etc.. And while you may still play a key role in solving these problems if you are the primary decision-maker for your small business, choosing a business structure that clearly separates your business from your personal life is an important step in protecting your personal assets if your business becomes the target of a lawsuit or insurance claim.
Improve Financing Options
Your business has a separate credit history from your personal credit, and lenders are typically interested in both for different reasons.
- Personal credit: this often plays a key role in securing the funding you need to get a startup off the ground.
- Business credit: as businesses grow, lenders generally want to see that your business is in good standing with other lenders.
Building a strong credit history for your business that is separate from your personal history is key to growth. It can help you offer new services, expand your service area, move to a larger building, or otherwise grow your business in ways that require more money up front.
Take Advantage of Business Account Features
Bank accounts, credit cards, and other accounts designed specifically for businesses often offer extra features not available through personal accounts. These accounts may offer more options for:
- paying bills
- submitting invoices online
- merchant services
- software integrations
These features can help you use technology to your advantage, offer additional payment methods, and consolidate your processes.
Imagine it’s tax season, and you spent the entire year using the same bank account for personal and business expenses. What you’re left with is a messy list of hundreds or thousands of transactions that you now have to separate so you can file correctly. The amount of time that will take (even if you pay taxes quarterly) will detract from the time you could be spending on business growth. Yikes.
Even if you are personally covering the majority of your small business's expenses during its early stages, keeping these expenses separate is essential if you want to avoid the above scenario and other financial difficulties. Using a separate bank account for your business will ensure you don’t need to waste time separating business transactions from personal ones when tax season rolls around.
How to Keep Personal and Business Expenses Separate
Opening a bank account for your business is the easiest way to separate personal and business expenses. Business accounts are often able to handle a larger cash flow and offer a higher level of protection from financial liabilities. You can put personal funds into this account to get started, but once you start increasing revenue, you’ll be able to track income and expenses in one place.
But a separate account isn’t the only way to separate your personal and business expenses.
Obtain a Business Credit Card
A business credit card is a multi-purpose tool. It will help you:
- Keep documentation of business expenses separate from personal expenses
- Build credit for your business (as long as you make payments on time)
- Help you cover smaller costs in the early phases of your business when cash flow is low without taking out additional business loans
Get an Employer Identification Number (EIN) for Your Business
You should be filing taxes for your business separately from your personal taxes as soon as possible, even if the line between your personal money and your business's money is blurry early on. Applying for an EIN will help you clearly separate your business’s total revenue, the portion that goes to payroll, which becomes important for tax purposes once you add even one other person to your team.
Choose the Right Business Structure
Knowing how to structure your business is an important step in making sure it is as separate from your personal accounts on paper as you want it to be. Many common types of business structures, such as LLCs and corporations, helps your business stand alone as its own entity. Other structures, such as sole proprietorships, allow this line to blur significantly and will not necessarily give you the distinction you want. Discussing your options with an accountant as soon as you start your small business can help you select a business structure that does what you want it to do.
Keep Accurate Financial Records
Even the best accountants can make mistakes from time to time, and keeping records of every transaction your small business makes can help you locate the source of a problem if your monthly or quarterly statements do not align.
Tracking each purchase or paycheck right away can also help you catch errors as soon as they occur and quickly identify transactions that may not have been added to the correct account if you notice a discrepancy.
At Valliance Bank, we are here to help you make the best possible decisions for your small business. Whether you are just getting started and relying on personal money to fund your startup or considering your options for separating an established small business from your personal accounts, we can help you evaluate your options to choose the best business accounts for you. Contact us today to learn more about the importance of keeping your personal and business expenses separate or to start the process of separating your accounts and expenses!