4 Reasons You Should Not Mix Business And Personal Finances

January 20, 2015 / Reading: 3 minutes

When you are starting a business, it is important to separate personal and business finances. As such, it is essential that you keep your business banking separate from your personal one.

While this may seem like common sense to many business owners, the reality is that a great deal of entrepreneurs don’t realize the importance of keeping personal and business finances separate.

One of the biggest mistakes new entrepreneurs make is not keeping their personal and business finances separate,Catherine Clifford from Entrepreneur.com

This applies to virtually any business, be it an LLC, Partnership or Corporation as it not only provides you and your business with credibility, it also helps you better manage your bills, taxes, and other payments. Most importantly, it reduces your personal liability.

1. Give your business credibility

Understandably, clients will not feel at ease dealing with a part-time business, and that’s exactly how your business can look if there isn’t an actual separation between business and personal assets.

Additionally, when it comes to receiving payments, writing checks and paying bills, it gives you and your business more credibility and also save you plenty of headaches. For example, If a client writes you a check with your personal name when making payments for services rendered, they may not take you as seriously as you would like.

2. Get Easier access to Loans

By creating a business identity that is separate from a personal financial identity, the business can build its own credit history and gain better access to borrowing power. 

When you are applying for a business loan or credit card for example, having personal and business finances mixed together can make it difficult to prove the difference between your income and your business income, simply because your business is not you.

3. Easily identify Business Expenses

When you use your personal account for business expenses, the business purchases are mixed with your personal payments. So let’s say you want to run a report on your expenses. Taking the time to weed out your personal transactions means can not only be time consuming, but also can lead you to make more mistakes, resulting in you having an inaccurate view of the growth of your business.

4. Be better prepared when the Taxman cometh

If all of your business and personal transactions are commingled, it is going to be very difficult to separate them from one another when it comes to filing your taxes. By having separate accounts for your business and personal finances, preparing your financial documents for your tax professional should be a breeze.

For sole proprietors and independent contractors who operate under their own business names, it is recommended to set aside a business bank account where a percentage of each paycheck is deposited to ensure that your tax obligations are covered. This way, when it comes time for making payments, you are not scrambling with your personal finances to cover your taxes.