The Importance of Keeping Your Business and Personal Bank Accounts Separate

The Importance of Keeping Your Business and Personal Bank Accounts Separate

New entrepreneurs and first-time business owners often assume that commingling their personal and business bank accounts will make their lives easier. Unfortunately, while the business of banking tends to be easier for business owners with commingled accounts, important things like tax reporting, account-keeping, and separating business expenses can quickly become a nightmare.

If you’re still using the same bank account for both your business and your personal finances, it’s time to make the switch. Here’s why:

Less Stress Come Tax Season

Separating your business revenue and expenses from your personal income will make life much easier come tax season. Instead of having to go through every personal transaction to determine your tax obligation, you’ll have all the pertinent information about business income and expenses in one place, separated from your personal finances. Business owners who maintain separate accounts have an easier time writing off business expenses and taking advantage of tax deductions.

The ability to keep personal finances separate from business dealings can also come in very handy if you are subjected to a Schedule C audit. Instead of having to submit your personal bank statements to the IRS, you’ll be able to send in only your business’s financial statements, making for a cleaner audit.

Building Business Credit

You need working capital to grow your business, which typically means securing business loans. It will be much harder to provide relevant information such as business income to banks and other lenders if it’s blended with your personal finances. Separating your finances will make securing a business loan and using it to build your company’s credit much simpler.

You may not think this is a big deal if your credit score is good. After all, you can leverage your strong credit score to harness more borrowing power for your business, right? Remember: the trade-off for securing personal loans to provide working capital for your business is that you’ll be left on the hook for any debt incurred if the loan defaults.

Giving Off a Professional Vibe

It doesn’t matter what line of business you’re in. Your customers want to feel like they’re working with a professional. Just like registering your business name makes people take it more seriously, separating your business finances from your personal accounts lends an extra level of legitimacy. Customers will be more likely to take the business seriously and purchase its goods or services if it’s immediately apparent that it’s not just legitimate but also run by someone who prioritizes professionalism.

Opening a business account will also offer you, and your customers, a greater range of transaction options. You can take out business credit or debit cards, accept credit card payments and digital checks, and offer the widest possible range of payment options to make life more convenient for your customers.

More Effective Cash Flow Planning

Maintaining clarity around your business’s cash flow makes it easier to decide where to spend money, when to take out loans, and whether it’s really necessary to dip into personal assets to provide for your company’s needs. Having a clear record of your cash flow also makes it easier to make accurate projections and simplifies the process of raising outside capital as needed.

As an entrepreneur, you rely on your business to provide for your personal needs. However, you won’t be able to ensure your company’s solvency if your business accountant is unable to differentiate between your business cash flow and other sources of personal income.

Reduce Personal Risk

Comingling your business and personal accounts can create unnecessary liability. You may be expected to use your personal assets for collateral when taking out business loans, for example, and could be held personally liable for any business debts if things go south.

No business owner wants to consider worst-case scenarios, but it’s unwise to ignore the very real possibility that your business could fail. If that happens, you want it to be easy to start over. Using your personal accounts makes it more difficult to do that if your business is in a bind.

The Bottom Line

Starting and growing a business is no easy feat, especially for first-time entrepreneurs. Separating your business from your personal finances can seem overwhelming, but it really is necessary for the long run. If you want to learn more about how to increase your profit margins while reducing potential risks to your personal finances, feel free to reach out to find out how we can help.