Finances are a rollercoaster of decisions. It’s overwhelming and the wrong turn can cost you big time. I’m here to help! Let’s talk about some basic personal finance versus business dollar dilemmas.
Should I separate my personal and business finances?
YES. Although the truth is, most entrepreneurs (myself included) pull from their personal savings to start their businesses. Separate bank accounts just aren’t the priority in those beginning stages. As soon as possible, open a separate business bank account… You’ll thank me later.
(BTW… I talk about this on my IGTV if you’d rather watch than read)
Here are 3 major reasons why you should separate your business and personal finances…
- Your professional image
Your business is NOT a hobby. You know that from the blood, sweat and tears you put into it (well… maybe not really blood, but kinda). Having separate accounts will help you establish your business identity. You should apply for credit cards and checks in your business name to help draw a clear line between business and personal.
- Tax reasons
Tax deductions are one of the primary reasons many business owners choose to separate their finances. Plus it’s the law! Separate accounts help maintain accurate records of expenses and help save time and stress when it comes time to file taxes. The quickest way to get on the IRS bad side is to commingle your personal & business finances. Take the proper actions now to prevent the headache and the thousands of dollars you’ll have to pay back in the form of taxes, interest and penalties.
- Save time & money
Think about it like this. You hire an accountant, but your business and personal expenses are intertwined. The accountant spends more time sorting through them and you spend more money. If the two are already separate, this equates to fewer billable hours. Let’s make things easier on you and your accountant.
Here are some other commonly asked questions about personal vs. business finances that will motivate and provide some clarity…
- What is the difference between a business account and a personal account?
Selecting a business bank account is more complex than opening a personal bank account, so make sure you do your research ahead of time.
Ask yourself questions like…
- Will your business have employees? How much will it cost to run payroll and pay employment taxes?
- What are the fees for bill paying? Minimum balances required?
- How many locations does the bank have?
- What mobile banking capabilities are accessible?
You likely don’t have to speak to bank representatives often regarding your personal account, but you will most likely need more communication in regards to answering questions about your business account.
- Can I use a business account for personal expenses?
The short answer is, no. Using your business account for personal expenses will often raise a red flag with the IRS and could land you in hot water. Business expenses MUST be directly tied to a business purpose.
- Can I use my personal bank account for my small business?
You could, but I wouldn’t advise it. Using your personal account in this way could communicate to the IRS that your business is more of a hobby and not intended to make a profit. Remember, business owners can deduct business expenses, hobbyists cannot.
- Is it legal to transfer money from a business account to a personal account?
Sure! It happens all the time, but the transfer should ALWAYS be recorded in accounting. Legitimate reasons include…
- Payroll transfer
- Dividend distribution
- Owner draws
- Expense reimbursement
Make sure you consult with your accountant before making transfers in order to avoid flagging the IRS.