Common Startup Mistake #5: Mixing Personal and Business Accounts

May 12 2019
Phil Bedford Written by Phil Bedford

One of the first things you need to do when you start a small business is set up a business bank account.

Unfortunately, this is a critical step that’s often overlooked by many new and part-time professionals exploring their entrepreneurial side for the first time.

Usually, when you’re starting a new company, you’ll be investing a lot of your own money into it. You’ll also be using the profits that you earn from the business to pay for your personal bills, as well as the expenses of the organization.
So, why do you need to split everything up?

The simple answer is that separating your business and personal bank accounts can save you a lot of time, frustration, and headaches when it comes to dealing with things like accounting and taxing.

The Dangers of Mixing Personal and Business Bank Accounts

Perhaps you’re a new business owner or a freelancer starting to get more serious with their investments for the first time. In this situation, you may not know that opening a business account is standard practice for entrepreneurs.

However, as your company grows, it’s essential to have a distinct line between the cash that you spend on yourself, and the money you use for your company. Failure to draw that line can mean that it’s harder to claim back some of the cash you spend on things like marketing, product development, and even employee wages.

After all, you can always tell the IRS that you were using that money for business purposes – but there’s no evident proof without a business bank account.

Here are just some of the reasons why it’s essential to keep your personal and professional lives separate.

1. Avoiding Legal Implications
By the time you launch your business, you’ll have gone through the complex process of filing the paperwork to choose the kind of company you want to run. One of the reasons that you decided to become an LLC or partnership is to protect yourself by separating yourself from the business entity that you create.

If your business and personal finances are mixed, you won’t have those legal protections, and they can’t defend you if something goes wrong with your organization. If your business does something to harm someone and gets sued, it’s you that ends up with the bill.

A unique bank account for your business finance helps to cement your position as a separate entity when legal issues raise their ugly heads.

2. Personal Asset Protection
So, say you do get sued and lose the fight in court. You’ll need to pay damages to the person or organization suing you out of your pocket. You won’t have any protection in place that comes with separating your business bank accounts and personal accounts, so you risk opening all of your money up to seizure if something goes wrong.

This means that you not only lose your personal assets but any money that you might have been saving back to pay for your finances too.

Even if you don’t have a legal issue to deal with, mixing personal and business accounts can make it difficult to determine how much money you can reasonably spend before you’re risking not having enough cash left over for your tax payments.

3. Tax and Bookkeeping Headaches
This brings us to our third point – business bank accounts protect you against accounting and book-keeping concerns. Certain business entities will automatically be required to file distinct
If your accountant is forced to dig through all of your personal records to identify your business purchases over the last year, that’s a massive waste of time, and can lead to mistakes on your tax return.

Even if your accountant manages to keep things accurate, there’s a good chance that they’ll charge you a lot more for the extra work.

4. Defense Against Audit Issues
There are a lot of deductions and tax credits that small business owners can leverage. However, it’s easy to attract some dangerous attention from the IRS if you claim a lot. One of the most common red flags for any business owner is to claim home office deductions. If the IRS decides to conduct an audit, then you’re going to need a well-documented division between your business finance and your personal accounts.

Taking the time to compare business bank accounts and set all of your expenses running through that account is a great way to simplify your record-keeping strategy. Fees for small business banking and fees vary by a financial institution, so make sure that you shop around for the best deal.

5. Maintaining your Professional Image
Finally, one of the best reasons to avoid mixing personal and business accounts is that it can harm your professional reputation. If you have clients that you’re sending invoices to or writing checks for, using your personal account signifies that you’re not a serious business owner in some circles. If you want to make an excellent reputation for yourself, then you need an official business bank account.

What’s more, aside from preserving your image, your business bank account also helps to identify what you’re doing as actually running a company, rather than just pursuing a hobby. The IRS states that only businesses can deduct expenses from their taxes. If the expenses you incur for running your business move through your personal account, the IRS might assume that you’re just making some extra cash on the side – not managing a company.

Protect Yourself and Your Business Finances
If the concept of business bank accounts and finance seems overwhelming and confusing to you-you’re not alone. Countless entrepreneurs consider the financial part of managing their organization to be the most challenging.

With a dedicated business account, you can reduce your risk of issues with the tax office, make life easier for your accountant, and eliminate countless headaches in your day-to-day life.

Use your business bank account to pay corporate bills, deposit cash, collect invoice payments and more, and you’ll find that running your new venture starts to feel a lot simpler.

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