Why is it Necessary to Keep Personal Finances and Business Accounts Separate for Entrepreneurs
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There are a few things about your business that entwine too well – like your business and personal Finances. They shouldn’t.Because it ends up in a disaster at almost all the times.
So how do you keep your business and personal finances separate? Also, how do you make it simple?
Well, for starters, you could try the following.
Establish Your Business as a Separate Entity
Business and personal stuff must always be kept disengaged.
You can keep it so by establishing your business as a separate entity such as LLP (Limited Liability
Partnership), Proprietorship, Partnership, Private Limited Company etc.
Getting a separate bank account in the name of your business, different PAN number, filing ITRs
(Income Tax Returns) in the name of your company and so on can also help you discern the
difference between personal and business finances.
Use Two Finance Tracking Systems – Personal and Business
Use Microsoft Excel, Google Sheets or QuickBooks or any other method to track your finances.
It is prudent to always keep separate tracking systems for both personal and business finances.
This way you can sum up your entire year of debits and credits effortlessly, become tax-smart and
also, save plenty of time which you can invest in improving your organization.
Separate Receipts and Save Them for the Record
It is perhaps the most effortless and straightforward practice you could ever employ to keep your
business and personal capitals disbanded.
What can be facile than keeping the receipts of your transactions physically separate?
Make one of those old school folders or scan the receipts and upload them to cloud storage. You’re
good to go!
Get a Business Credit Card
They’ll spam you with all the free-credit-card emails but when it comes to small business or
entrepreneurs, seldom do they lend out credit cards quickly.
Getting a credit card enables you to use credit from the bank for all your business transactions. Using
a credit card will result in no spending from your personal savings at all.
This way, there is an apparent gap between your personal and business finances which helps you
immensely when it’s ‘tax time.’
Credit cards have other benefits as well. Your business credit card may upsurge your credit score
which can be immensely helpful in future borrowings. It also makes you eligible for any business
loans with lesser interest rates, gets you an added tax deduction and anoints you a legit entrepreneur.
Keeping personal finances and business accounts separate is advisable for entrepreneurs.
However, with freedom, comes responsibility. In any unforeseen event do you max the card out, it can
equally hurt your credit score awarding you counter benefits of what’s mentioned above.
Why is this Necessary and What Implications Can This Have?
Keeping your business and personal finances separate is absolutely necessary as it plays an instrumental role during the tax season. Because taxation demands a clear and balanced account for a quick and easy
It also saves you lots of time and energy keeping you unruffled during the cumbrous tax season.
If not kept separate, you would be compelled to separate your business finances from your personal at
the end of a fiscal year for tax purposes in a short amount of time. This will result in errors and probably demand even more work and time.
So it is only logical that you keep it separate from the very start of the year.
A separate business account helps you amount your profit and losses over any duration of time easily.
This won’t be likely if your business and personal finances are in a union. Hence, putting you in a
the condition of an impasse about your businesses’ financial status.
Remember, in your personal finances, in the individual capacity you earn, then pay taxes, and then spend from what is left behind. However, as a business, you earn, then spend on all the necessary operational and capital expenses, and then pay tax on the rest. Hence it is very important, at least from a tax perspective, to have clearly demarcated business expenses being met from the business account. Paying for them from your personal account would be highly taxed inefficient.
There is another perspective to this and that is when things don’t go well.
This is the reason why personal finances should be kept separate. There could be threats to the business, such as regulations, litigations, competition, or changing market dynamics making your product or service obsolete. At these times the financials of the business could become a burden. Having all finances mixed up, will provide a convoluted view of your position and not reveal how badly your business is doing as you might be supporting it from your personal savings. It is important to be able to draw the line of when you need to put a hard stop in mixing finances as that might be the time to cut losses and shut the business down.
If this line is not clearly defined due to one’s finances being mixed up when it eventually does happen not only does one lose everything in business, but the personal finances are also left in a bad shape.
In cases of litigation, separate finances also have the advantage of protecting some of your assets without bringing everything into the scope of the legal proceedings.
Hence it is wise to work with a professional and start creating distinct divisions in your personal and professional finances.