Why It Pays to Separate Personal and Small Business Financing
by Claire Parker, Staples® Contributing Writer
When it comes to small business financing, separation is a good thing. And in many cases, its the only legal option. Here, small business experts, accountants and lawyers explain why its necessary to keep your personal finances and business finances in different accounts.
Know Your Liability
The biggest issue with commingling your finances is a complete loss of protection that a corporation provides, giving business creditors full access to personal assets, not to mention a compromised tax situation, says Timothy McFarlin, a lawyer in Irvine, CA.
Legal business structures like LLC, LLP, and S and C Corp require separation of funds and protect the owners personal assets. Sole proprietors and members of simple partnerships are personally liable for business debts and obligations.
Separating business finances and personal finances is also important if youre married, explains accountant Celeste Zimmerman, a business consultant in Evergreen, CO. While no one wants to think about divorce, it is a business consideration.
Keeping finances that are commingled can have unintentional results, she says. If your business is not incorporated and not an LLC or LLP, and you commingle the finances with your spouses finances, this business will most likely become a marital asset. That puts your enterprise in play during divorce proceedings.
Takeaway: If there is no clear distinction between your personal finances and business finances, lawyers could seize personal assets if your business is sued or if you dissolve your marriage.
If the taxman cometh, having clean, simple and accurate books will help you avoid penalties and worse.
Your accountant will appreciate you for doing this and you will save on tax preparation costs since the transactions are kept independent, says Alana Muller, president of business development organization Kauffman FastTrac in Kansas City, MO.
Organizing your business finances and personal finances separately can give you an easier path to tax time.
If you are not sure which expenses are business related and which are not, it could be hard to figure out what transactions you can and cannot write off during tax season, explains Leslie Tayne, a lawyer with Tayne Law Group in Melville, NY.
Takeaway: Investing in separate sets of books may require a little more time on your end, but it will yield meaningful returns at tax time. Whenever you start to mix personal and business expenses and finances together, you begin to muddy the waters, which could end up flooding you later on, Tayne says. A separation of state in personal and business finances allows for effective financial management.
Key Considerations for Separating Your Business Finances & Personal Finances
Of course, separating your finances is not necessarily as easy as having two different sets of records. Consider these four crucial points:
1. Know your legal obligations: Consider legal structures for your business that protect your personal assets. Check the requirements of your businesss legal structure to ensure you arent breaking the law.
2. Establish separate accounts: Get a debit card, credit card, checks, etc., in your companys name.
3. Keep your books clean: Hire a bookkeeper or accountant, talk to your banker, or use small business financing software to account for your finances.
4. Manage your money: Keep business finances separate so you can get a clear picture of how your business is performing and can determine how much you can pay yourself and your employees.