While mixing business and personal finances may seem like a practical way to manage your business, it can expose you to more financial risk and hinder your business from growing. Here’s why you should not manage your business with a personal account:
Accounting and bookkeeping help determine a business’ profitability. Thus, any inaccurate documentation may interfere with your business records and may have detrimental effects.
Take the example where you or your accountant have to sift through your personal bank statement to balance your business’s profit and loss account. This would be time-consuming and potentially result in the use of inaccurate information in bookkeeping.
When it is time to file your business tax returns, you will need to sort out the income and expenses in your business — which would be easier if you didn’t have to dig through your personal bank statement to retrieve this information.
Moreover, retrieving information from your personal records may lead to tax errors or, worse, attract IRS auditors’ attention. Sparking such interest will likely not end well. There’s a high possibility of the auditors finding a contentious issue with your tax returns, and what follows may turn out ugly.
You’ll Lose Clients
Using your personal bank account for business transactions could be why potential clients are shying away from doing business with you. Sending out invoices with mismatched business names and account details may not be good for your business credibility. Instead, open a business bank account and make your business look established and legit.
The Bank Will Finally Catch Up with You
Your expenses grow with your business. Because of this, your bank may note the huge change in your personal bank account and may request you to open a business account. Failure to do so may put you at risk of losing your personal account.
Nightmare When Applying for Business Loans
While the idea of securing a business loan may not seem necessary in the initial stages, there will come a time when you’ll need financial aid. Financial lenders will then review your business statement to evaluate its creditworthiness. Unfortunately, mixing your personal and business finances will cause your loan application to be rejected.
You are in business to make money, and you should never let any coin slip through your fingers. A dedicated business bank account makes it easy to identify deductible tax returns. Mixing your business finances with your personal finances may cause you to lose time and money, as well as the potential of missing tax deductions, exemptions and credits.
Separating your business from your personal bank account is the best practice for any business owner. It’ll save you time, money and allow you to operate your business with peace of mind. You should, therefore, strive to open one soon!