For a lot of entrepreneurs, self-employed individuals, and small business owners, the thought of managing finances through their personal bank accounts might seem like a cost-effective idea, as you would technically avoid additional bank fees and subsequent expenses. Even though this might seem like a sensible solution to your accounting needs, it is not a very prudent idea and by choosing this path you might even create problems for your business down the road.
From making a mess of your tax filing efforts, to letting a potential deductible slip through the cracks, all the way to losing out on a great loan when you need one just because you were unable to present a clear financial overview to the lender, the risks are numerous for those who choose to keep their personal and business transactions on one account.
With that in mind, here are the five reasons you want to separate the two for good:
1. Separating personal and professional life
First and foremost, it should go without saying that keeping your personal and professional lives intertwined in any way can lead to trouble down the road. This is especially true for finances, as managing cash flow on a single account can prevent you from having a clear overview of your financial situation.
Not only is this risky in terms of your day-to-day transactions, but it can be a downright nightmare when you sit down with your accountant in an attempt to work out your financial situation. Additionally, keeping your accounts separate means that you can take advantage of tax deductions – something that would be difficult to do if your personal and business finances are mixed up.
2. Maximizing tax deductions
When the time comes to file your taxes, you want to have a clear overview of your finances not only for the sake of efficiency and effectiveness but also because you will have a much easier time figuring out which expenses you can deduct from your taxes. This way, you will avoid the hassle of going through every bank statement trying to figure out which transaction was for business and which for personal purposes – ultimately, this means you won’t lose out on deductions.
3. Present a clear financial overview
It should go without saying that having a clear financial overview of your personal and professional finances can go a long way in growing your business, which not only means managing company cash flow with ease, but also being able to apply for excellent second mortgage loans when the time comes to expand and push money into your company.
By tidying up your personal and professional finances, you can present a clear financial statement to your lender, in turn getting a better residential or commercial loan. On the other hand, if your finances are all tangled up, you’re running the risk of lowering your loan potential.
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4. Give your business a professional look
If you have a company, you need to understand the importance of developing a professional, trustworthy image your clients can appreciate. However, if you write checks to your clients using your own name instead of the official signature of your company, you’re bound to come off as an unprofessional business venture.
People want and need to see an organized structure, a brand they can trust and most importantly, a company that can justify the invoice. Needless to say that unless you have a personal brand that bears your name, you cannot expect to create a trustworthy company let alone grow your business accordingly with the use of your personal checkbook.
5. Avoid hefty penalties and fines
Lastly, filing taxes is a chore not to be taken lightly, and if you make a mistake on your business or personal taxes due to a complicated bank statement, you could end up paying hefty fines and penalties. No matter how skillful an accountant you are, there is really no reason to risk attracting the attention of the IRS simply because you’ve commingled your personal and business finances. Instead, just open up a separate business account in order to present a clear audit trail the authorities can easily verify.
Many modern business owners try to keep their finances as simple as possible, often avoiding to open a separate business account. Unknown to them, this is actually hurting their company in the long run and it may even create personal liabilities as well, which is why separating your business and personal finances is a prudent and sensible solution for long-term financial success.