Importance of Separating Your Personal from Business Accounts

For many people operating small businesses, it’s easy to blur the lines when it comes to small expenses, use of company property or accounts and even the use of personal accounts to keep the business operating.  While it’s true that a sole proprietor wholly owns the business and so its accounts and equipment, there are several reasons it is advisable to keep business and personal accounts separate.

Photo:Creative Commons

Tax Issues: When an individual is operating a business, it’s important to carefully track and document expenses for tax purposes.  Even relatively small expenses like VoIP providers and Internet service providers add up, and the entrepreneur will want to be able to include them as business expenses. However, taking those deductions will require clean records that separate the cost of personal calls and web browsing from the services purchased specifically for business purposes.

Legal Liabilities: Many small business owners go to the trouble and expense of setting up a business structure specifically designed to shield their personal assets should the business fail and be unable to pay its debts or incur significant liability through a lawsuit or other unexpected event.  However, those protections may all be for nothing if the business owner then mingles his personal accounts with the business accounts, blurring the lines between the legal entity that is his business and himself. A clear separation of all types of accounts, including bank accounts and service provider accounts, will help protect the business owner’s personal property, home and other assets from liabilities of his corporation.

Future Business Opportunities: Not every small business owner wants to remain a small business owner: some aspire to grow a large business and others hope to build the business up to a certain point and then sell it.  Still others plan to keep operations small, but at some point encounter financial difficulties that require them to seek out loans or investments.  Any business owner hoping to sell his business or to make a successful pitch to investors will need clean, accurate books to show the value and earning potential of the company.

When a small business owner is operating alone and is entitled to all of the profits of his business, it can be very easy to get sloppy with the finances and the obligations of the business and to mingle professional accounts with personal ones or fail to account for profits taken out of the business or personal investments added.  However, keeping those accounts separate and well-documented is critical. No small business owner wants to find himself on the hook for company liabilities or having his tax deductions questioned simply because he paid his office VoIP providers with a personal check.

Citations:

• Photo Credit: title=”Resident paperwork” by Medill DC, on Flickr

Helen Hoefele is on a team of writers who regularly contribute to blog and news sites.  Follow her @figmentations.