The Importance of Separating Personal and Business Finances

Business and finance

There are many perks to running your own business, from taking charge of your own schedule to exercising your options as key decision maker. These are just a couple of the benefits that come with owning your startup.

But, at the same time, leading a startup venture comes with great responsibility. One key area that demands clarity and distinction are your personal and business finances.

It is critical that you keep  your personal and business finances separate, not only for the sake of your business, but also for your personal stake.

For tax and credit purposes alone, it’s a good idea to keep your accounts separate. It’s best if your business finances are not tied to your personal financial status.

This means, when applying for loans or credit cards, determine which accounts will be for yourself or your business. Mixing the two blurs the line between your personal and company income.

So, what steps do you take to ensure your are separating your personal and business finances?

Keeping organized and up to date with your bookkeeping practices is essential, but there are additional tips that will help to create sound fiscal practices and separation of personal and business accounts.

  • Business Credit Cards — Avoid the lure of funding your business with personal resources. Open a line of credit to give your startup working capital.
  • Separate Bank Accounts — You must keep separate bank accounts for yourself and your business. If not, crossing that line of distinction can lead to skewed numbers and misleading company financials.
  • Business Budgets — Budgets are a good practice for you and your company, especially a startup. You need to know the ins and outs of your cash flow, where it is coming from and where it is going. A budget is critical to determining future financials and can help structure growth goals.
  • Business Expenses — Expect trouble if you don’t keep your personal and business expenses separate. Categorizing personal expenses — anything that does not pertain to running your business — is essential.

Understandably, you may encounter difficult times during the launch of your startup and you may find it tempting to cross over from one account to the other. But, in the end, mixing the two only leads to confusion and complication, particularly when it comes to taxes, audits, and proper use of business funds.

Also consider this scenario: If your startup is doing well and drawing income, using business income to cover personal expenses can siphon revenue and ultimately harm the fiscal health of your company. Likewise, if you dip into personal accounts to keep your business afloat, you can’t provide an accurate financial assessment and you may wind up with no business and no personal savings to fall back on.


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