As the owner of a business, generally you’ll have a personal vested interest in the finances. But it’s essential to keep your personal finances separate from your business finances, and vice versa. Separate your finances and you can ensure long-term success and growth, but if you don’t maintain a distinct separation then you could face a raft of consequences.
Even when starting out, it’s important to maintain a record of what have been business expenses and what are personal ones. And you should be careful to never blur the line.
Legally, your business is considered a separate entity and there are a number of risks you may face if you mix your finances.
Why keep them separate?
There are two main reasons to ensure your finances are separated – accounting, and ensuring your personal assets are protected.
Accounting
Come tax time, you’ll need to be on top of your business and personal finances, and you’ll need to ensure they’re treated separately. While it’s common for many sole-traders, small business owners and entrepreneurs to pay for business expenses out of personal accounts or personal expenses out of the business account, it’s going to be much more difficult to determine which expense is which when asked.
How will you determine what your profit and expenses are for your business if there is a raft of other transactions attached to that account?
Furthermore, expenses for your business become tax deductions at the conclusion. Come tax time, there is the potential to miss important tax write-offs if the account has personal expenditure tied to it.
Risk to your personal assets
Not drawing a distinction between personal and business finances may even put your personal assets at risk. If there is no difference between you and your business, if someone tries to sue your business, you can be held personally liable and any assets in your name can be caught in the crossfire.
According to ANZ’s Small Business Hub, in the event that your finances are combined, a lawyer can determine that your business is not a separate entity and your personal assets can be repossessed to cover any mistakes made by the business.
How to keep them separated
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- Use different bank accounts
While this may sound glaringly obvious, it’s the most important step and the one you should be making first.
Make sure you have different accounts and different credit cards, and talk to someone at your bank to find out which type of account is best for your business.
Only use your business account for payments that relate to your business, and never let the two accounts crossover. This allows you to build business credit independently. - Decide what is business and what is personal
While there may be some overlap with small business owners, it’s important to differentiate exactly what is a business expense and what is personal. The most common example tends to be with cars. While the car may be under your name, it may be primarily used for business purposes, so petrol may become a tax-deductible expense under your business.
In this instance, make sure you identify what expenses may overlap, and break down exactly what percentage is business use and what is personal. Then attribute those expenses to the particular account. - Pay yourself a salary
By paying yourself a salary out of the business account, it’s easier for you to define exactly what amount can be attributed to personal expenses. Pay yourself the same amount each month, as it will help maintain the boundaries and ensure your business budget stays on track. - Set a budget for both
You don’t want to be pulling personal finances into your business and likewise, your business can’t afford for you to pull money to pay for personal expenses. Create a clear budget based on the earnings of the business, and make sure you stick to it. Personally, make a budget of what you can afford without dipping into any business accounts. This will help avoid you putting personal finances into the business mix if there is a shortfall and vice versa.
- Use different bank accounts
- Track all your expenses
Track shared expenses and separate expenses in different spreadsheets. While it may be easy to just chuck on that extra toner to the business receipt, if you’re going to use it in your home printer then it’s important to flag is as a personal expense. When you’re paying bills, if there are business expenses and personal expenses there, ask the cashier to create two separate receipts and pay for them using your two separate accounts.
It’s equally important to do this for separate expenses as well to ensure you stay on track with your budgets. Have separate files for business receipts and personal receipts, and make sure they remain separate. This will also help come tax time.
While it may seem obvious, mixing your business and personal finances can cause a world of trouble. Keep them separate, even if it seems a bit more time consuming, and you’ll find it much easier in the long run.