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Why its Important to Keep Business and Personal Finances Separate

As a small business owner, you may have heard someone tell you to keep your personal and business finances separate. For some this is obvious, but others may want to know why exactly this saying has been floating around the business owner space for a while. Today we’ll dive into why you really should be keeping your business and personal finances separate.

Tax reasons

As a business owner, you have access to certain tax breaks and tax deductions for your business. It may also get confusing if your finances are mixed together when it’s tax season. If your business is audited by the IRS, it will be more difficult to prove your business expenses versus your personal expenses, so it is in your best interest to keep the accounts separate.

Business credit

Did you know your business has a credit score? It’s true! It is separate from your personal credit but works very similar. If your business and personal finances are mixed, it’s very difficult to determine what your business’s credit score is. You can pay off business debts, pay your taxes correctly, and keep detailed records of your finances to raise your business credit.

Personal liabilities/legalities

Your personal finances are at risk if you are a business owner who does not keep your personal and business finances separate and your business faces legal trouble. You can help limit your personal liabilities should anything happen by separating your business and personal finances. Separately, selecting the best business entity for your business can also help you mitigate personal liabilities.

Accounting purposes

Having clean books is essential when running a business. For accounting purposes, keeping your personal and business finances separate just makes sense! Your accountant will appreciate it and you limit the likelihood of being audited by the IRS. It will also be much easier to track your spending and cash flow when you have separate accounts.

Funding purposes

We understand that business owners need help from time to time. It is critical to have your personal and business finances separate if you intent on getting any funding for your business. Most funding companies require at least three months of your business bank statements, and if they find that it is a personal account your application may be declined. Be sure to keep your personal and business finances separate in order to have a better chance of getting funding for your business.

Wrapping Up

You have probably heard the phrase so many times during the course of your career. Keep your personal and business finances separate! I know we definitely sounded like a broken record, but we hope that we brought you more clarity about the importance of this concept and why it matters. By keeping these accounts separate in the beginning, your accountant and your future self will thank you!

This content is for educational or informational purposes only and should not be taken as legal or financial advice. The information in this content does not necessarily reflect the views of Coast Funding Services LLC or its partners.

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