Let’s talk briefly about a business best practice that I’ve encountered numerous times… keeping business and personal finances separate.
There are some serious consequences but more importantly, there are some fantastic benefits of following this best practice. I don’t think a single one of us started a business to have it run us into the ground or to not make any money. Unfortunately, this happens to businesses everyday but I want to pass along as much useful information as I can to keep that from happening to you. So here it goes, keeping business and personal finances separate helps significantly in knowing where a businesses financial health stands. You’ll probably get sick of me saying this but the difference between thriving businesses and struggling business is how they view, handle and deal with their financial situation. One easy way to move towards success is by keeping business and personal finances separate.
So what are the steps to keep everything separate? Well, open up a separate business bank account. I promise, it’s really that easy. The second step is to only use that bank account for business purposes. When you need some of that money for personal use, transfer it into your personal bank account.
I recommend making regular transfers, kind of like a paycheck. Either once a month or twice a month or even weekly, whatever works for your business and personal financial situation. Transfer a set amount from the business to your personal account. The key here is to live within the means of what the business can afford to pay you (and we’re looking for an amount that is comparable to what you would make for the same position at a different company).
Then, when you go to create fin
ancial statements for the business, things look much cleaner and it’s much easier to see the financial position of the business.
Why do this
There are several reasons to keep business and personal finances separate. Some of them are just good practice and some of them can have legal implications if things aren’t kept separate.
Let’s start with the simple reasons why keeping the money separate is a good idea. When funds start to get mingled from business and personal, this can cause some major cash flow issues within the business because it’s hard to know exactly what is coming in and what is going out of the business monetarily. Certain transactions might get confused as business related items when really they are transactions for personal use and this can go the other way too. When money going out of the business bank account (or business credit card) is strictly for business use, the picture comes into focus and gets much more clear when you are looking at the financial reports.
Now we can move onto the reason why commingling can cost the business or the owner’s more money. I’m sure we’ve all heard the story about the business owner that waits until the last minute to deal with their taxes and then walks into their accountant’s office with a giant box of receipts. Then, on top of that, there are personal receipts sprinkled in with the business receipts. Not only will this give your accountant or tax preparer and major headache but they are probably charging a significant amount more to sift through the rubble. Secondly, this can cause some tax filing issues and complications. If the IRS suspects a red flag and an audit arises, there is sure to be a messy battle over what is business and what is personal.
Finally, let’s not forget about the serious, legal consequences of co-mingling business and personal funds. If a business is set up as an LLC or Corporation, this is where you need to listen up. When funds are co-mingled, this is what is called “piercing the corporate veil”. Sounds bad doesn’t it? Well, it can be really bad and have some pretty serious consequences for the business and the business owner’s. How so? Well, let me explain.
A lot of owner’s will set up a business as an LLC or a Corporation to safeguard their personal assets if something were to happen to the business. Well, if the business isn’t being treated as a business and personal transactions are being thrown in the mix with business transactions things can get pretty nasty. So let’s say a series of unfortunate events happen within the business and the business gets sued. When a judge sees that the business is “piercing the corporate veil”, the judge could easily rule the personal liability protection null and void. In a worst case scenario, if the business loses the battle, the plaintiff could possibly gain access to the business owner’s personal assets (cars, houses, savings accounts, etc.).
Now, I don’t want to scare anyone but keeping the funds separate is a pretty easy way to give you a little peace of mind. All in all, open a business bank account, follow the steps in the “How To” section of this article, life will be much easier and you’ll be well on your way to owning a thriving business!