Most business owners try to maintain separate business and personal lives, if for no other reason than to keep their lives in balance. It is a challenge, especially in a business startup situation, or where the business is kicking into high gear and the demands of the business consume most of the owner’s time. There is one aspect of a business owner’s life that should be kept separate, no matter how busy he or she is and that is finances. To avoid serious legal and financial consequences, business owners must keep business transactions separate from personal ones.
What Can Go Wrong?
Trouble with the tax man: The first consequence that most business owners will realize is the amount of difficulty they will have when compiling records and computing their taxes. By separating business and personal transactions throughout the year, the amount of time to compile information needed to file taxes can be reduced substantially. And, if your tax filing triggers an audit, the auditor will have a problem with deductions when the waters are muddied because business expenditures are tangled with personal expenditures. All told, the amount time, effort and possible audit costs, are simply not worth it compared to the simple processes involved in keeping transactions separate.
Personal assets at risk: The bigger potential problem is that significant business liabilities that can arise for any small business owner. Creditors or claimants who come after your business may find additional fodder in your personal assets if it can be shown that there is inadequate delineation between your business transactions and your personal ones. Even if you operate as a corporation or LLC, your personal assets could be at risk without a solid wall around all aspects of your business, including taking care to separate business transactions.
It’s Simple to Separate
Keep checking separate: The easiest way to create a separate life for your business is to open a business checking account. This is also the least a business should do to create a separate identity as a legitimate entity. Pay business bills from this account, not personal ones.
Give your business credit: These days, most transactions are completed with credit cards, and there is no doubt that credit cards are the most convenient method of payment, especially for internet purchases. If you have more than one credit card, the least you should do is to use one strictly for business. The recommended step is to apply for a credit card under your business name and use that only for business transactions.
If your business is new, without established credit, this may be difficult. But, it is important to begin building a credit history for your business as soon as possible. It is sometimes easier to obtain credit from business suppliers, such office supply stores. Gas credit cards are also fairly easy to obtain. The key is to build a list of credit references that can help the business establish its own lines of credit.
Keep your records accurately: Even if it’s not possible to keep transactions completely separate, your case with an auditor, creditors and claimants is strengthened when your records demonstrate a clear delineation of business and personal expenditures. Software programs such as Quicken or QuickBooks offer versions that automatically upload transactions from your checking and credit accounts, and, based on the attributes you assign to these transactions, the program automatically records them in the appropriate business or personal category.
Keeping business and personal transactions separate reinforces the separation of your business and personal lives, which is a very basic form of asset protection.