Are you running your personal and business expenses out of the same account?
If so, you are not alone. I find that many freelancers, independent contractors, or entrepreneurs make the same financial mistake.
Here are some of the benefits of separating your business and personal bank accounts:
Clear Financial Picture of Your Business
Were you profitable last year? What about last month? After expenses, how much are you really making? Can you afford to spend more on marketing? How much?
Separate business and personal accounts will make these questions easier to answer and will establish a business mindset. I believe it will ultimately make you more successful.
Less Stress at Tax Time
Most are aware of the benefit of business expense deductions. Expenses reduce your taxable income from the business, which of course reduces your taxes. If your business and personal accounts are commingled, it makes it tough to determine which expenses are which.
If you just want to spend as little time as possible on your taxes (who doesn’t?), you may just underestimate your business expenses to be on the “safe” side (in case you are ever audited), but this potentially results in payment of “extra” taxes. No one wants that.
Personal Budget Accuracy
If you are trying to pay off debt, or increase your savings, it is pretty darn important to understand where your money goes. Too many tell me that, “I can’t make a budget because a lot of my expenses are for my business.”
Okay, so don’t do that. Really, this sounds like an elaborate excuse to avoid creating a budget!
Business Credit History
You may not want to get a business loan or line of credit right away. But it might be a smart move if you want to expand your business down the road. If you have a bank account and financial history for your business, you’ll be more likely to be able to get credit when you want or need it.
Protection of Personal Assets
Consider your business liability. If your business were to be sued, and your business and personal accounts are one an the same, payment from your personal assets could be required. Separation of your business and personal accounts is one step in protection from liability. Speak to an attorney.
How to Fix It
If you are using one account for both business and personal expenses, you can fix it in three easy steps:
1. Open a separate business bank account. You can do it online, at a local bank branch. You will be required to have a business name and tax id number when opening up a business banking account. Discuss with your tax advisor.
2. Pay your business expenses with your business account. Business expenses might include a new laptop or printer, internet access, travel to an industry conference, or a meal with a new client.
3. Set a regular transfer to your personal bank account. Knowing how much money you have coming in makes it so much easier to budget and plan.
If you are running your business and personal expenses out of the same account, why? Setting up a separate account is easy and you’ll be glad you did. Get started today.