6 Reasons Why You Should Keep Your Business and Personal Finances Separate

Many business owners begin by supporting their venture with personal funds. As a result, it is fairly uncommon for people to continue to use their personal bank accounts and credit cards for business purposes as they progress.

However, keeping separate business and personal bank accounts is always a smart idea. While it just takes a minor adjustment, opening a business bank account provides significant benefits such as tax savings and building a business credit score.

Because sole proprietors are not legally required to register a separate business account unless they operate as a corporation, they don’t always see the value of putting separate business and personal bank accounts for various reasons:

  • Setting up a business bank account takes time
  • Sole proprietors pay personal income tax to account for business net income
  • They don’t have separate legal status from their business so they assume any risks associated with it.

However, the advantages of keeping business and personal bank accounts separate generally exceed the disadvantages.

Here are six reasons why keeping your accounts separate is the best way to go:

1. Accurate Cash Flow Management

While your bank balance does not provide a complete picture of your cash flow, keeping your business and personal finances separate makes it easier to manage and react to your present financial situation.

For example, If you find that your balance is getting low, you can do a quick cash injection. If you realize that your account has too much money sitting around, you can put it to better use elsewhere.

Maintaining separate business and personal bank accounts also makes it easier to demonstrate your financial situation. The more organized your financial records are, the easier it will be to apply for money from a lender or credit provider.

2. Efficient Tax Returns

Separating your business and personal bank accounts can not only help you save time during tax season, but it will also help you file more accurate tax returns.

When business and personal spending are combined, going through every line on your bank records can take hours, if not days, and increases the risk of including or excluding the wrong items.

Separate accounts make it easier to identify taxable benefits and deductions, which simplifies your record-keeping.

Fun fact: Did you know that the bank fees you pay to run your business or process payments qualify as tax-deductible business expenses?

3. Clear Audit Trail

One of the benefits of being a sole proprietor is that you have complete control over your business. You’re more likely to be audited, which is one of the disadvantages.

Employee T4 slips clearly reflect annual earnings, deductions, and taxes withheld, which is why small business owners raise more red flags than people who work for someone else.

Having a separate bank account does not guarantee that you will have fewer audits. Separating your business transactions and establishing a clear audit trail, on the other hand, will make the process less painful.

4. Organized Bookkeeping

When you use your personal credit card or debit card for business expenses, it’s difficult to tell the difference between personal and business transactions on your bank statement.

Setting up a separate bank account allows you to keep track of your business transactions more easily, allowing you to:

  • Maintain accurate and up-to-date bookkeeping.
  • When it comes time to file your taxes, you won’t have to dig through months of records and invoices to separate your company and personal expenses.
  • Get caught up on your year-end bookkeeping more quickly.

You may also link your business’s bank accounts to cloud-based accounting software like QuickBooks to track sales and expenses in real-time.

5. Business Credit Score

Having a separate business account aids in the development of your business’s credit rating. Your business credit score, like your personal credit score, reflects your company’s creditworthiness. A good credit score might help you get better terms on business loans and lower your insurance costs.

IDM advises all of its clients to maintain their corporate and personal bank accounts separate. You can focus on growing your business while our team focuses on optimizing your bookkeeping and delivering accurate financial reporting. To learn more about how we can assist you with keeping your books organized, please contact us.

6. Business Credibility & Professionalism

Maintaining business credibility is critical whether you operate a consulting firm or a coffee shop.

While many small business owners do this by developing branded logos, websites, and marketing materials, another method to display professionalism is to keep your business and personal accounts distinct.

Making and receiving payments directly through your firm through a business bank account generates a higher degree of trust with suppliers and clients.

Starting a business is no easy feat, especially if you are navigating business finance and taxes for the first time. Separating business and personal finances may appear daunting, if not impossible, but it is vital in the long run. By doing so, you’re putting your business in a position to benefit from tax advantages and even larger profit margins, all while lowering the risk to your personal assets. After going through this process, you will be one step closer to achieving your dream of running a successful business.