As you run your business, sometimes you’re tempted to inject your personal finances to give it a boost in case things go wrong along the way. But that’s not always the best way to make things work for your business. It’s worth noting that your business is an independent entity, and that’s how you should treat it.
But how can you achieve this?
It’s as simple as separating your business and personal finances. As much as you’d like your business to thrive, it would be best if you also safeguarded your finances to muscle up for risky days in the future.
For you to understand better, here’s why you should separate these two finances.
Protection Against Lawsuits
As mentioned earlier, your business needs to be an independent body, separate from you and your personal finances. Registering your business as a limited liability private company is one way to separate yourself from the business.
The next step is separating the finances. If any party sues your business, your liability from the company will only be as believable as your separation of finances. If the finances have meshed, the separation will only look superficial.
Avoid Compliance Issues
Separating your business and personal finances can save you time and effort during an audit. By keeping separate accounts for both, it won’t be challenging to comply with the government’s requirements.
During the audit, you’ll have to produce supporting documents, financial reports, tax returns, and any other relevant information. If the two finances are separate, it will be easier for you to produce expenses that pertain to your business.
Cultivate Financial Stability
As an entrepreneur, you know that putting up a business comes with lots of uncertainties. While you’ve done proper research of the market and set aside adequate capital to keep it going, you can’t predict what the future has in store.
Difficult times will come, and to keep things ablaze, you’ll have to inject more capital into your business. Therefore, instead of spending your income on personal expenses, you’d instead save it in readiness for the bumps that you’ll encounter along the way.
Reduce Your Tax Amount
In case you didn’t know, separating your business and personal finances can help you with your taxes. Why? It’s easier to monitor your business expenses for tax compliance purposes if you’re using a separate account for your enterprise.
It’s worth noting that every receipt counts when filing your taxes, from office expenditure to operational expenses. Having properly-organized information specifically for your business will make your work easier during this time and save you from paying more taxes than what you’re obligated to pay.
To make the process of tracking your business expenses seamless, consider using online accounting software for your SME.
Make Your Accountant’s Work Easier
The essence of separating these two accounts is to make sure you only use your business account to pay the entity’s expenses. This also applies to your personal expenses. That means you have to separate the receipts of both finances.
In case you or your accountant want to review business expenses for the previous year, it would be easier to search for those files. Moreover, it wouldn’t be challenging to analyze and manage your cash flow since you’d have separate receipts and expenses for both accounts.
It’s Easier To Obtain a Business Credit Card
Obtaining a credit card for your business comes with numerous advantages. Apart from helping you eliminate the need for a personal credit card for business purposes, a business credit card can help you build a strong credit history for your company. And of course, this increases your chances of getting a loan if you need a boost along the way.
However, before getting a credit card for your company, you will have to check your business’s financial status and not your personal finances. That’s why you need to separate the two.
With the year coming to an end, you will soon be filing for your business and personal earnings for the end-year income returns. If you have separated these finances, you will have an easier time and probably reduce your tax liability through tax deductions. If you have not separated these finances, consider doing so. It will reduce your liability if creditors sue your business and help manage the finances and taxes going forward.