For many entrepreneurs and solopreneurs, it’s common to create a business with personal financial resources. For someone like me, with a solo business and no employees, it’s especially tempting to use my business financial resources as my personal financial resources. After all, my income is my family’s income. It all goes to the same place, so it doesn’t matter if it’s a little mixed up, right?
Actually, it does matter. Keeping your business finances separate from your personal finances is important if you want to make things easier for you, and reduce trouble come tax time.
Protect your personal finances from your business setbacks
When you first start with your business, your personal assets do matter. You might need to use your own capital for startup costs, and there is a good chance that your personal credit will be used in the decision to extend your business credit for the first time.
However, as your business grows, it’s important better define the line between you and your business. John Rampton, a serial entrepreneur and business consultant, knows the value of keeping your personal finances separate. “There is a level of protection for your personal finances when they are separate from your business finances,” he says. “If your business is structured properly, and your finances are separate, a setback for your business doesn’t have to become a setback for your personal financial situation.”
A good example of the importance of keeping your personal and business finances separate comes from Robert Kiyosaki, the author of Rich Dad, Poor Dad, and the owner of multiple businesses. When one of his companies announced bankruptcy a couple of years ago, his own personal fortune was protected. Even though one of his businesses had financial issues, the fact that Kiyosaki kept things separate meant that his own individual resources weren’t impacted.
This can even apply in the event of a lawsuit. If someone sues your business, and it is properly organized and legally separate, your personal assets might be protected from the consequences of the litigation.
The same can be applied to credit. As your business grows and develops its own credit history, you can separate your personal credit from your business. That way, if something happens to your company, and your business credit is tarnished, it won’t have as big an impact on your personal situation. The protection can work both ways; you can protect your business finances to some degree from your personal financial setbacks when you keep your business credit separate.
Consult with a knowledgeable business organization expert, attorney, or accountant as you work toward creating a separate financial profile for your business.
Better records for your business
Another good reason to keep your business credit separate from your personal credit is for record keeping purposes. If you use your personal credit card to purchase business supplies, it’s harder to show the separation, especially if your business purchases are buried on a receipt with several personal expenses. What happens if you are asked to show documentation during a tax audit, or for some other reason? Using your business credit for business purposes and keeping it separate from your personal financial uses can help you quickly and easily track your expenses, and report them to the IRS.
It can also make record-keeping easier for your own purposes. Keeping track of payroll, business purchases, and other overhead costs is much easier when you have separate accounts for business. You can quickly and easily track spending trends and plan for the future when you maintain separate accounts.
Build business credit
Building business credit is often difficult. Initially, you will be required to provide personal information, and you might need to a personal guarantee a business credit or loan. However, once you have your first business credit account, do what you can to build a credit profile for your business. You can register with the business credit reporting agency Dun and Bradstreet, and ask that those you work with report your good credit behavior. Using your business credit card wisely, and not overdrawing your business checking account, can help boost your business credit reputation.
As your business establishes its separate credit profile, eventually it will be able to get credit without your personal guarantee.
Even if you operate as a sole proprietorship, it can make sense to at least open a business bank account and use it for income, and for business expenses. You can “pay yourself” out of your business account, and that will also create another layer of record-keeping that can serve you well at tax time.
“Even though you feel like you are your business, especially at the start, it’s vital to build those walls,” Rampton says. “It makes things easier for you, and it can also provide your personal finances with protection against business catastrophes.”