Setting boundaries between your professional and personal life isn't always easy, especially if you're juggling work and family tasks during the same hours. According to the OECD Better Life Index, working long hours may increase stress, impair personal health and jeopardize safety.
However, it's important to have a work-life balance so you're not getting pulled away from date night or quality time with your family. Similarly, it's essential to keep your personal accounts and business finances separate. Mixing professional and personal funds could expose you to risks in a few key areas.
Managing cash flow
It can be challenging to understand your company's cash flow status if you're pulling money out for personal reasons. As the owner, that money may be technically yours, but your personal expenses must come out of personal accounts.
When you routinely siphon money out of your business account to pay for personal groceries or mortgage, you don't have an accurate report on the financial health of your company. For this reason, cash flow management is an essential skill for your business's success.
Filing taxes
When you file business taxes, you'll need to access your business income and expense information. If personal transactions are mixed with business expenses, it'll take time to sort, identify and prioritize everything—which can add pressure during tax season.
The closer you get to tax time, the less you'll remember which expenses were personal versus business, and you could mistakenly overlook legitimate business deductions. This is why it's important to establish boundaries so you can easily track your business profit and expenses throughout the year.
Knowing legal risks
Paying for personal expenses from your business account may expose you to potential legal and financial trouble. If your business is a corporation or limited liability corporation, your personal assets are protected from professional liabilities if your business is sued or fails. However, if you pay personal bills from your business account, you can negate this protection. This is known as piercing the corporate veil, and the court could consider you liable for business debts.
If an audit shows personal receipts on your business account or cash withdrawals for personal reasons, it may look like you're draining company funds for your own gain. This can make investors or business partners think twice about working with you. Stakeholders could also sue you for misappropriation of funds.
Using your business account
Instead of using business funds, make sure you regularly take a salary or profit distribution. It's easy to set up an automated lump-sum transfer every week, 2 weeks or monthly. This way, you won't dip into business funds if you need cash for yourself.
Use your business bank account only for business expenses, and set up a dedicated system for managing business finances. You can use a tool like QuickBooks or hire a bookkeeper. Always keep business and personal receipts separate as well. Establishing a strong bookkeeping process will help you maintain transparent accounting practices for your business.
You can also open a business credit card and checking account to pay for business expenses, which may help you easily generate reports for tax purposes. Paying credit card bills on time also helps build your business credit score.
Be diligent about separating your personal and business purchases. As a business owner, you may combine errands and buy personal and business items at the same time. Always ask the cashier to ring up these purchases in two transactions.
The bottom line
Keeping your business and personal accounts separate is a smart way to manage your money and business. When you set up the proper structure and follow best practices, you help build and maintain the financial health of your company.
FAQs
Separating business and personal finances is essential for tax reasons, but perhaps more importantly, for ensuring that your personal assets remain secure. New business owners often sign personal guarantees for loans and lines of credit when a business is young and without an established credit history.
Why is it important to separate personal and business transactions? ›
Keeping your business assets separate from your personal finances can be a liability and help protect your assets in the case of any legal actions. Nobody ever wants to think about hard times that may hit their business, such as the need to dissolve it or to be entangled in legal issues.
How to keep business and personal finances separate? ›
Let's look at some easy ways to do it.
- Put your business on the map. ...
- Open a business checking account and get a business debit card. ...
- Get a business credit card. ...
- Pay yourself a salary. ...
- Separate your receipts and keep them. ...
- Track shared expenses. ...
- Keep track of when you use personal items for business purposes.
Legal Protection: Separating personal and business finances provides crucial legal protection by avoiding complications during tax audits or legal disputes. Accurate Financial Tracking: Keeping finances separate allows for accurate and transparent financial records, simplifying budgeting and cash flow management.
What is the difference between business and personal expenses? ›
A business owner needs to know the difference between a business expense and a personal expense. Business expenses can be claimed against the profit to reduce taxes and save money. Personal expenses cannot reduce taxes for your business.
Why should you separate business and personal expenses? ›
Separating business and personal finances is essential for tax reasons, but perhaps more importantly, for ensuring that your personal assets remain secure. New business owners often sign personal guarantees for loans and lines of credit when a business is young and without an established credit history.
Why is separation of business and personal assets so important to the owner of proprietorship? ›
Legal clarity and liability protection: Separating business and personal finances can help to protect your personal assets from business debts and liabilities. For example, when you form an LLC, the principals have personal-liability protection.
Why keep finances separate? ›
Benefits of Separate Accounts
Before tying the knot, you may both have existing financial obligations, such as student loans, credit card debt, or personal investments. Keeping separate accounts could make it easier to manage these premarital financial responsibilities without entangling them with your joint finances.
How do you keep business and personal life separate? ›
5 best practices to set boundaries between work and personal life that everyone knows, but few of us follow.
- Avoid looking at work messages and e-mails during your time off.
- Dedicated space at home.
- Establish boundaries with others.
- Sports activities.
- Take a break from technology.
However, the accounting entity must have a separate set of books or records detailing its assets and liabilities from those of the owner. An accounting entity is part of the business entity concept, which maintains that the financial transactions and accounting records of owners and entities cannot be intermingled.
Yes, you can use personal money to pay for business expenses (just not the other way around.) In fact, most businesses start up this way with the owners putting their personal money into the business to get things started. In the end, the accounts track it all when they balance the books.
Can I put personal money in my business account? ›
You can fund your business with whatever amount of personal money you choose. However, you'll need to report any deposit over $10,000 to the IRS.
Should I have my personal and business accounts at the same bank? ›
If you operate your business as an LLC, partnership, or corporation, your business' legal structure can shield your assets should you be involved in a lawsuit. If you mix your personal finances and business funds, you jeopardize your protection. So it is best to use a business bank account for corporate transactions.
Can I pay my personal bills out of my business account? ›
As the owner, that money may be technically yours, but your personal expenses must come out of personal accounts. When you routinely siphon money out of your business account to pay for personal groceries or mortgage, you don't have an accurate report on the financial health of your company.
Can I take money out of my business account for personal use? ›
To put it simply, when you mix your business and personal finances, you're essentially treating your business as a personal piggy bank. 🐷 And while it's not technically against the law to make a personal purchase from your business account, it can lead to major issues with taxes, bookkeeping, and compliance.
How do you organize personal and business expenses? ›
Open a Separate Business Bank Account
As a business owner, it's important to have two separate bank accounts – one for your personal expenses and the other one is for your business. However, it would be better to open a business bank account with a different bank from where you maintain your personal bank account with.
Why transaction between owner and business are recorded separately? ›
This concept is called business entity concept. It means that personal transactions of owners are treated separately from those of the business. Therefore any personal expenses incurred by owners of a business will not appear in the income statement of the entity.
Why is it important for a business to have a separate bank account? ›
A business bank account puts your business's name on checks, credit cards and other payment methods, sewing credibility and trust into each financial touchpoint you have.
Why should responsibility for related transactions be divided among different departments? ›
Separation of duties is critical to effective internal control because it reduces the risk of both erroneous and inappropriate actions. All units should attempt to separate functional responsibilities to ensure that errors, intentional or unintentional, cannot be made without being discovered by another person.
Should the transactions of the business should not be accounted for together with the personal transactions of the owner of the business? ›
The business entity concept states that the business is separate from the owner(s) of the business. Therefore the accounting records for even the simplest business, the sole trader, must be kept separate from the personal affairs of the owner or owners.
