Why Business and Personal Finances Don’t Mix

Benefits of keeping your personal and business finances separate

12/22/2014

If you’re a business owner, then you know how hard it can be to keep work from invading your home life. Doing paperwork at the dinner table or heading into the office on a Sunday may be unavoidable from time to time, but there is one aspect of your business that you should never mix with your personal life: your finances.
 
“One of the biggest mistakes new entrepreneurs make is not keeping their personal and business finances separate,” states Catherine Clifford from Entrepreneur.com.
 
Why Business and Personal Finances Don’t MixAlthough this may be obvious to seasoned business owners, many entrepreneurs don’t realize the importance of keeping personal and business finances separate. Some entrepreneurs may even begin their businesses as a hobby and fail to separate their finances when that hobby grows and becomes a true business.
 
Unfortunately, this common mistake has widespread repercussions. Mixing business and personal finances makes many aspects of running a business much more difficult. One of the first problems that you will run into is the increased complexity of budgeting and accounting.
 
When it is not clear where money came from or if it was spent for personal or business use, accounting accurately is nearly impossible. If you keep your finances separate, you will be able to clearly see what your expenses, profits and revenues are, so you can budget effectively and determine if you’re spending wisely.
 
Even if you feel that the convenience of using your personal and business accounts interchangeably outweighs the increased accounting difficulty, mixing your personal and business finances can jeopardize your personal savings.  Clifford warns entrepreneurs that, “without a clear division in your finances, your personal assets are less protected if your business is sued or you take out a business loan and can't pay it back.”
 
Commingling finances also has a negative impact on your taxes. Proper documentation is necessary to obtain your maximum refund and to avoid an audit. Without separate finances, however, it’s difficult to document your business’s expenses to the IRS. The easiest way to avoid a tax-time headache is to maintain separate bank accounts for your business and personal life.
 
“If there's ever a question as to whether it's a hobby or a business, the IRS looks to see if you have a separate checking account,” states certified financial planner Richard Salmen.
 
Another easy way to separate your finances is to maintain separate credit accounts. If you only use your personal and business credit cards for appropriate purchases, your statements will be easy to understand at the end of the month. If you use your cards indiscriminately, you may not remember if a charged lunch, for example, was for business or pleasure when your statement arrives.
 
Financial advisor Edward Wacks was interviewed by entrepreneur.com in order to find out the best ways to keep your accounts separate.
 
“To prevent yourself from getting lax about keeping your finances separate, think as though you have business partners,” says Wacks. “You wouldn't expect your business partners to pay for your groceries or the recent fill-up at the gas station: that will have to come out of your personal piggy bank,” reports the website Entrepreneur.com.

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