Importance of Separating Business Finances from Personal Finances
by Simplice Essou | August 21, 2023
When starting a new business, it is common for business owners to comingle their business and personal finances. However, separating one’s business and personal finances may help maintain a clearer picture of the company’s cash flow and financial health apart from your personal assets and liabilities. Below are a few benefits of separating business finances from personal finances:
- Tracking business cash flow: By ensuring business and personal finances are maintained separately, business owners can easily get a better picture of their business cash flows. Most business owners pay for startup costs with their own funds, and it is crucial these expenses be tracked accurately. Bookkeeping and the production of financials such as the balance sheet and income statements are made easier when there is a separate business account.
- Accounting function made more efficient: By keeping business finances and personal finances separate, it makes preparing for tax time easier as well. Determining which transactions are for business and which ones are not can be a daunting task for your accountant or CPA.
- Taking all tax deductions: By opening a business, bank account and using it exclusively for business purposes, it will be easier to keep track of business expenses for tax purposes. Maintaining a separate business account makes it easier to keep track of all the invoices, receipts and other transactions that could result in tax deductions. This can result in large tax savings and create a positive cash flow for the business.
- Protecting your personal assets from legal liability: By separating personal and business finances, owners will be treating the business as an independent entity and safeguard their own personal finances. Keeping business affairs separate from personal affairs can help protect owner’s personal assets from legal liability. Having business and personal affairs entangled makes it easier for a plaintiff to go after owners’ personal assets in the event of a lawsuit filed against the business.
Steps To Separating Business Finances and Personal Finances
Separating business finances and personal finances is a process. Therefore, here are a few steps you can take in your business journey to start off on the right foot:
- Incorporate the business: To achieve that separation, business owners could consider incorporating the business as a C corp., limited liability corporation (LLC). Setting up a corporate structure can also ensure owners’ personal assets are protected. To register the business in Florida, one can go to the Florida Department of State’s website.
- Apply for an EIN number: The second step will consist of registering with the IRS to obtain a EIN number. The registration can be done by going to the IRS website.
- Open a business account: Once the business is incorporated, and has obtained an EIN number, the next step will be to open a bank account in the business name. This will help calculating cash flow and make recordkeeping more efficient.
- Get a business credit card: Establishing business credit is important. In some industries such as government contracting, this can be the difference between success and failure. Obtaining a business credit card can be a quick way to start building and establishing business credit.
Overall, there are great benefits to having your business finances separated from your personal finances, including being able to track your finances more efficiently and protect your assets from legal liabilities.
Author: Simplice Essou
