A Brief Guide To Separating Business And Personal Finance

Updated October 6, 2023

Only 80% of small businesses succeed in their first year. Knowledge of finance is one of the factors crucial to the success of any business. Most owners even dip into their personal savings to finance their business. As a best business practice, it’s important to separate business and personal finance right from the start. As a business owner, you might be asking why we need to separate the two; it may seem like more work. After all, you’re the same person. Nevertheless, accounting for these two parts of your life separately will be easier, and will lead to success in both aspects.

Business and Finance

Importance of separating business and personal finance

You may want to determine and analyze the cost of doing business through the income and expenses of the business. The costs amassed by your business might increase unnecessarily if your personal finances are tied with your business finance. In addition, intertwined books of accounts will not give you a proper view of your current assets and your liabilities. Numerous laws also require individuals to have separate accounts for business and personal expenses. Separation is not just necessary; it is also mandatory due to existing laws, especially tax laws. You might find yourself having tax cases because you might have combined your personal assets with your business assets. Such assets are important in the calculation of a person’s tax obligation. Separation of personal assets from business assets is also necessary. For instance, if you got a mortgage by using your house and you have difficulty paying it off, then when the time comes, your business will most likely be not affected by your personal finances. You can still run a successful business even if you have to file for bankruptcy.

Ways to separate business and personal finance

The easiest way to separate the business from personal finance is to establish a partnership or a company for your business. In this way, your business is a separate entity from you. It also provides protection for your personal assets. It is wise to have separate bank accounts and credit cards. In this way, there will be no need to analyze and determine whether a transaction was for business or personal use. Additionally, it would be best to have separate loan accounts so that there is a clear distinction between your liabilities.

Hiring a professional accountant is also a wise decision to help you manage your finances.  An accountant can guide you to determine the different categories of expenses and your taxes as well. More importantly, an accountant can help you keep your books clear.

Business owners intertwine their business and personal finances all the time. Separating business and personal finance is one of the ways to protect both your business and yourself, and it is crucial to the success of your business.

Leave your comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.