Ultimately, separating personal and business expenses is not a question of if but when. Often, small businesses find that the lines blur between what belongs to them and what belongs to their business—and it can threaten your private assets.
Let’s explore the top five reasons why separating personal and business expenses should be at the top of your to-do list as a small business owner and the side benefits you’ll enjoy once you do.
1. Limit Your Liabilities
Not separating personal and business expenses is a common mistake small business owners make when first starting out. After all, putting all your money in one place sure sounds easy, but it can leave you legally vulnerable in the long run. The number one reason you need to distinguish between business and personal money is simple: it limits your liability.
If your business ends up with a lawsuit, debt, or other trouble, you’ll never have to worry about it becoming your own personal liability. On the other hand, if you personally experience a lawsuit—for instance, from a car accident that damages someone’s luxury car—or a bankruptcy, separate personal and business finances will help you protect your company and its assets from your losses.
2. Reduce Your Tax Burden
On its own, separating personal and business expenses may not result in a direct reduction in how much you pay in taxes. Still, it will bring down your personal income (allowing you to pay taxes in a lower income bracket). Meanwhile, it will enable your business to make use of many business deductions that you otherwise couldn’t use.
For instance, you’ll easily be able to add up essential expenses, like the cost of your merchant service provider, to help you calculate profit and deductions. However, to make the most of deductions, you should brush up on your record-keeping requirements. You’ll need to keep receipts and invoices for all of your business purchases.
3. Protect Yourself During Audits
Regarding taxes, the benefits of separating personal and business expenses go beyond helping you reduce your tax burden—it can also help protect you in the event of an audit. If the IRS audits your business finances, separate accounts will help you clearly delineate between business and personal expenses, which is exactly what the IRS will seek to do.
On the other hand, combined accounts will put both your business and personal expenses in the spotlight if you or your business is audited. This will require you to prove the validity of every transactionAn act between a seller and a cardholder that results in either a paper or an electronic representation of the cardholder’s promise to pay for goods or services received from the act. The action between a cardholder and a merchant that results in financial activity between the merchant and cardholder’s account.... you claimed as a business deduction and vice versa.
Given the complexity of the tax code and how easily it’s misinterpreted, you should do everything in your power to make filing taxes and handling audits as straightforward as possible. After all, common mistakes (like underestimating taxes) can bring your new business to a screeching halt.
4. Attract Lenders and Investors
While many small business owners fund everything themselves, there may come a time when you seek out an investor or two to help you take your business to the next level. Even more likely, your business will need a credit line or loan at some point in the future. In either case, separating personal and business expenses well in advance will help you close the deal.
Both lenders and investors will want to comb through your financial records to verify your profit and expenses, and the last thing you want is to have them sifting through your personal records while they do it. Additionally, combined finances can raise a red flag because it makes it more difficult for a lender or investor to discern how much your business is earning, spending, and holding.
5. Simplify Record-Keeping
While the actual process of separating personal and business expenses may take time and will require you to set up some new accounts, the initial setup is the hardest part. Once you have things separated, you’ll find that record-keeping and reporting get far simpler.
With your business finances all in one place, you can easily see how much you’re earning, spending, or losing at a glance. Additionally, opening dedicated business accounts will give you access to certain banking features. For instance, most business bank accounts offer lower fees and other perks.
Tips for Separating Personal and Business Expenses
If you started your own business from scratch, it’s easy to end up with personal and business finances entangled into one another, but that doesn’t mean it has to stay that way. With so many reasons to separate your finances, you can clearly understand why you should do it, but it can still be daunting to check it off your to-do list.
Ultimately, the first step to separating your personal and business expenses isn’t that hard; you just need to open up some new accounts. Most likely, you’ll keep your existing accounts for personal use and seek out new accounts that your business can use. It starts with a business checking account, but you might also decide you need a business credit card.
With new accounts opened, the next step is updating your payment information for any business services and subscriptions, so they charge to your new account. Likewise, any revenue you earn should be deposited directly into the business accounts. From there, you can send money out of your business account and into your personal account as your paycheck.
The rest of the process comes down to habits. For instance, if you’re used to pulling your personal debit or credit card for business-related purchases, you’ll need to get used to charging those things directly to your business accounts. From there, it’s a good idea to look into establishing an LLC or other entity to separate your business and personal endeavors further and protect your assets.
As you expand your business, yet another way that you can support sustainable growth is by partnering with the right merchant service provider, like NMA. NMA is A MerchantA business that accepts credit cards for goods or services. Account That Works For You, and our goal is to make running your small business as simple and profitable as possible. Learn more at our website.
About NMA
NMA is a merchantA business that accepts credit cards for goods or services. advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, NMA’s payment processing solutions have delivered tailored solutions, best-in-class customer service, and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or e-commerce, NMA will create the best processing experience for your company.
For more information, visit us at our legacy.nationalmerchants.com or call (866) 509-7199.