Why Do You Need to Separate Personal and Business Finances?
Not keeping your personal finances separate from your business finances can cause problems on numerous fronts. Generally issues from mixing personal and business finances fall into the following categories:
It raises red flags with the IRS that you are operating a hobby and not a business
It makes it hard to get a clear picture on the health of your business
It may create liability issues
It may be tempting when you own a business to just swipe a business card to cover that personal expense. After all those funds are really that of the owners right? Not quite, and using business funds for personal purchases can create problems on more than one front. Let's break down all the reasons you should not mix personal with business and then cover some tips for keeping them separate.
The IRS requires that business expenses and personal expenses be kept separate. Business expenses are often allowed to offset business income, but personal expenses are often not allowed to offset business income. In the event personal expenses are allowed to be deducted they are often subject to different regulations than business expenses. Personal expenses during an audit will raise red flags and potentially cause a further investigation. Trying to claim personal expenses as business expenses could result in fines. Self-employed individuals are more likely to be audited than individuals with a W-2 job. So if you think you're safe from an audit think again. Tax planning is a more effective way to reduce your tax liability and it's also legal.
It Doesn't Give You a Clear Picture of The Health of Your Business
If you're mixing personal with business you're not really looking at an accurate picture of the financial health of your business with your books. Keeping your business and personal finances separate allows you to see how your business is doing and also keep track of your personal spending. You can better identify ways to save in both your business and your personal life this way.
It May Open You Up to Liability
So we're not attorneys and do not give legal advice, but the point of having a business such as a LLC or corporation to protect your personal assets may be ineffective if your personal affairs are mixed with your business affairs. Again, the legal repercussions should be discussed with an attorney.
Let's Talk About How to Keep Them Separate
So now that we've talked about why you should keep them separate let's talk about how. Our top tips can be found here.