Why You Should Keep Business and Personal Expenses Separate
While some aspects of your personal and business worlds will overlap, there is one crucial rule that every business owner should follow: keep your business and personal expenses separate. In this blog post, we’ll explore the importance of maintaining this separation and the benefits it brings to your business.
1. Legal and Tax Compliance
One of the biggest reasons to keep business and personal expenses separate is legal and tax compliance. When you mix personal and business finances, it can create a legal and financial nightmare. Proper separation ensures that your business operates within the law and adheres to tax regulations.
Some people might think that if it comes out of the business account it can be deducted. That’s just not true. It must be used for the business for it to be deductible. There are even special rules for property that can be used for both personal and business. These types are called listed property.
By maintaining a clear distinction, you can easily provide accurate records and defend yourself during an audit.
2. Financial Clarity
Separating business and personal expenses provide financial clarity. It’s challenging to understand your business’s true financial health when personal expenses are mixed in. You aren’t able to create accurate budgets. Clear financial records are essential for making informed decisions. With separate accounts, you can track revenue, expenses, and profits accurately. This clarity enables you to set realistic financial goals, create budgets, and measure your business’s performance more effectively.
3. Securing Loans
Banks lend on their financial analysis of your books in order to determine if you are a worth credit risk. Mixing personal expenses into your business overstates expenses, which can lead to difficulty securing loans or getting a less attractive interest rate.
This doesn’t just affect a business’s ability to borrow, because for most small business owners, they and their business’s finances are tied together. You could be reducing your ability to borrow to buy a home or a car, affecting your family.
4. Attracting Investors
Most investors have an ideal rate of return they would like to make when investing in a company. Including personal expenses in your business’s financials makes your business look less attractive to an investor.
An investor is also going to be leery of an a business whose books are filled with the personal expenses of the owner, as they want to make sure that their investment is used to grow the business and not fund more personal expenses.
5. Selling Your Business.
One of the ways that businesses are sold is as a multiple of net income. When you include net income in your business expenses, you are making your business look like it performs worse than it does.
6. Simplified Accounting and Bookkeeping
Mixing personal expenses with your business accounts can create a tangled mess that is challenging to unravel. This results in time extra time spent. Whether it is your time or you are paying someone else, there’s a cost. It’s easy to eliminate this cost by simply using separate accounts to manage your personal and business finances.
Most business nowadays are using accounting software that connect automatically to your bank accounts to save time recording transactions, but you negate this time savings if you have to filter personal expenses out of your feed.
7. Asset Protection
Another good reason to keep business and personal expenses separate is asset protection. In the event of legal disputes, bankruptcy, or creditor claims, separating your finances can shield your personal assets from potential liabilities associated with your business.
Without this separation, personal assets such as your home, car, and savings could be at risk if your business encounters financial trouble. Separation helps safeguard your personal financial security. This is called piercing the corporate veil.
8. It Stunts Your Business Growth
This might be the most important reason to separate business and personal expenses. It will stunt your business’s growth. Anything that is stressful creates a chaos that affects us. You might avoid going into your software, or not respond to your accountant’s email of the list of transactions that they have questions about because it is stressful. Or maybe you do respond, but you don’t get right back to work because you need to decompress afterwards because it was stressful. You are hurting your business.
Business comes with its own inherent stress. We don’t need to add productivity killing stress when it is so easily eliminated, so separate your personal and business finances and watch your business grow!
Conclusion
The importance of keeping business and personal expenses separate cannot be overstated. It ensures legal and tax compliance, provides financial clarity, simplifies accounting, and protects your personal assets and helps you grow your business. So, take the time to establish clear boundaries and maintain separate accounts.
