There are tax reasons, legal reasons and business reasons why it makes sense to keep your business and personal financial records separately. It is not difficult and could save you money, plus you will eventually have to anyway. Here are a few important reasons why you should keep your finances separate:
Tax Reasons
The first and most common reason is taxes. If you are reporting your business expenses in your own tax filings, you are more likely to get audited, according to Internal Revenue Service statistics. It also makes it a lot harder for you to keep track of things. If you are blurring the line on your personal and business finances, it makes it very difficult to know exactly how your business and you personally are performing financially.
Finally, you will likely miss business expenses that you can deduct. When you treat your business as a business, there are many expenses you can deduct that you can’t if you treat your business as a hobby. In short, by keeping your business and personal expenses separately, you will save both time and energy in record keeping. On the off chance that you are audited, you will have everything in order for the IRS as well.
Legal Reasons
One of the most important reasons for filing for an LLC, S-Corp or C-Corp is legal protection. If your product somehow harms a consumer, or your competitor decides to sue you, you are only liable to the extent that your company can pay, but not personally liable.
However, if you mix your personal and business finances, that can be grounds for a lawyer to say your corporation isn’t truly a corporation. In other words, by mixing your finances, you risk being personally liable for your corporation’s mistakes.
Business Reasons
There are many good business reasons to keep your personal and business records separately. One is that if you don’t keep separate records, it makes getting a business investment or a business line of credit practically impossible because you can’t prove your business earnings if they are mixed in with your personal expenses.
Second, you personally will treat your business very differently when it is run as an outside business. Most people find that they treat their businesses much more professionally when it is a separate entity, as opposed to an extension of their personal finances.
We have just touched on several tax, legal and business reasons on why you should keep your business and personal finances separate. The process isn’t difficult or expensive; all it requires is a new bank account and debit card.
