Managing finances can be overwhelming for many small business owners, especially those without a background in finance or accounting. While combining personal and business finances might seem convenient, it often leads to complications in the long run. Separating business funds is essential to maintain financial clarity and prevent confusion.
Here are 6 reasons why it’s crucial to keep your personal and business finances separate:
1. It makes it easier when you have to pay taxes
Mixing personal and business finances can cause major challenges during tax season. Separating them makes it easier to distinguish between personal and business expenses, reducing the risk of errors and missed deductions. Entrepreneurs often need to deduct business expenses, and having clearly identifiable, business-related transactions simplifies this process, making tax time less stressful and much smoother. If you’re not sure what you can write off as a deduction, there are tax preparation software solutions that make tax season simpler by enabling you to instantly categorize business expense and income transactions, automatically set aside a percentage of your income to cover your tax payment, and generate pre-filled tax forms.
2. It can help establish your business credibility
Having a business bank account helps establish credibility and helps potentially build a business credit profile, which is crucial for developing business relationships and obtaining funding. Customers also feel more comfortable making payments to a business account, and many banks and large companies check a business’s credit report before deciding to work with them. This dedicated account ensures clear financial records, enhancing trust and facilitating smoother transactions.
3. It can help protect your assets in case of any legal actions
Establishing clear boundaries between personal and business finances is essential for liability protection. Mixing them can expose your personal assets to creditors if your business faces financial difficulties. By keeping finances separate, and by establishing a legal entity such as a limited liability company to run your business, you may help protect your personal property and reduce the risk of being held personally liable for business-related debts, particularly if you maintain the proper corporate formalities.
4. It may help secure a business loan and other financial assistance
If you are looking for ways to fuel your business growth, such as opening a new location or purchasing new equipment, a business loan or other means of financial assistance can be beneficial. Without a business bank account, securing a loan for business growth can be challenging. Having a business bank account may also make your business eligible for various kinds of assistance if there’s an emergency. For example, during the Covid-19 pandemic, many banks would only process government aid for those who had business bank accounts. By maintaining a business account, you put your business in a better position to receive financial aid in times of crisis.
5. It can give you more clarity on your business finances
Separating personal and business banking accounts allows you to maintain financial clarity and improve overall business management. This separation allows for more precise financial reports, insights, and statements, providing real-time visibility into a business’s financial health.
6. It can help you manage your cash flow
Maintaining a positive cash flow is vital for your financial health, as it helps you determine when to pursue growth or scale back. It ensures you can pay your bills and employees on time and manage debts efficiently. Conversely, a negative cash flow indicates you are spending more than you are earning, making it difficult to cover your expenses. One easy way to track your cash flow is by using a platform that combines both banking and accounting software, making it easy to track invoices, payments, and expenses all in one place.
Conclusion
Keeping your personal and business finances separate is essential for maintaining financial clarity, protecting your personal assets, and enhancing your business’s credibility and growth potential. When choosing a bank for your business, consider factors such as fees, loans and benefits, and remember that not all banks offer business checking accounts.
When all aspects of financial management are connected, business owners can see the bigger financial picture, make more informed and strategic business decisions, and focus on meeting their goals.
Want help separating your business and personal finances?
Lili offers a business checking account that has no hidden fees* and requires no minimum balance. It also offers a high-yield business savings account with a competitive 4.15 Annual Percentage Yield.**
A financial platform designed specifically for businesses, Lili combines advanced business banking with built-in accounting and tax prep software. By naturally consolidating financial tools into a user-friendly interface, Lili streamlines and simplifies managing business finances, and makes it an attractive solution for business owners seeking a centralized and efficient way to manage their financial operations.
*To see the list of fees please refer to the Fee Schedule (Sections 3.6 and 8.1) of the Sunrise Banks Account Agreement.
**The Annual Percentage Yield (“APY”) for the Lili Savings Account is variable and may change at any time. The disclosed APY is effective as of September 1, 2023. Must have at least $0.01 in savings to earn interest. The APY applies to balances of up to and including $100,000. Any portions of a balance over $100,000 will not earn interest or have a yield. Available to Lili Pro, Lili Smart, and Lili Premium account holders only.
