We encourage every business owner or self-employed individual to keep business accounts and personal accounts separate. Even if you simply have a part-time business or do freelancing work. There are several reasons for doing so, but there are three in particular that we will be discussing today.
Reason #1: Simplifies Determining Personal & Business Finances
The primary reason that we encourage keeping your business and personal accounts separate is that intermixing your personal finances with your business finances tends to make understanding the business’ wellbeing much harder. Not just for your personal understanding, but external uses as well. For example, applying for a business loan or line of credit.
Obtaining a loan or line of credit requires that there be a clear line of distinction so that the lender can verify if your business would be able to repay the loan. The addition of personal finances complicates matters. And even if they are willing to overlook the intermixing, it would also place them into a position to be able to claim the personal assets of the business owner.
Reason #2: Avoid Piercing The Corporate Veil
One common practice, to protect one’s assets, is to register your business as an LLC or a Corporation. Under the aegis of these classifications, the business is fully considered a separate entity and so should the business be forced to pay off debts and still be found lacking, the business owner and those who have invested in it will not be held liable and forced to surrender their own assets. This is known as the “Corporate Veil” and can mean the difference between losing your business and losing everything if something goes horribly wrong.
However, a court can and will ignore the corporate veil, “piercing” it, if they deem that the separation has not been adhered to fully, such as using business funds to pay for personal expenses. Once that happens, those behind the business entity, such as the owner and investors, will be held personally accountable for those debts. And in doing so they will be made to pay for it.
Reason #3: Tax-Time Complications
Recently, we discussed how the recent changes to the meals and entertainment deductions allow for many expenses related to them to be fully deductible for tax purposes. However, that comes with the stipulation that they are used for business purposes. That becomes a relatively simple matter to keep track of if you pay for these specific meals with a business account or credit card, giving you clear records for both yourself and the IRS. But if your personal transactions are intermixed with these, it becomes a lot more complicated to sort through them all—and the alternative is to simply miss out on them entirely.
Keeping your business and personal accounts separated avoids these sorts of tax-time complications. It provides you with clear records of profits and losses and expenses, asserting that you have been operating your business to the best of your abilities. The very last thing you want is for tax season to come around and needing to scramble because you have to fish through every transaction to figure out what was used for business and what was used for personal reasons.
And with that, we draw to a close here. Contact Us if you want our assistance in doing your bookkeeping. And remember to subscribe to our blog so you can keep up to date with more helpful tips and advice.
Komentarze