Why You Must Keep Business and Personal Finances Seperate
I opened my first business at the tender age of 22. I still remember the pride I felt when I took my first check for a job completed to my local bank and tried to deposit it in my checking account.
I also remember the shock I felt when the bank teller denied my request. “This check is made out to your company, not to you,” he patiently explained.
I tried to reason with him. “What’s the difference? I own the company. I did the work and earned the money. My last name is prominently featured in the name of my business, for heaven’s sake.”
Didn’t matter. I couldn’t deposit the check unless I either a) opened a business checking account in the name of my business, or b) provided paperwork proving that I’d registered it with Idaho’s Secretary of State.
I’ll admit I was a little naive with the bank teller. After all, he had no way of knowing that my business actually existed. But I learned a lesson that day that went well beyond Cashing Checks 101.
I discovered that separating your business and personal finances should be a basic first step for any entrepreneur hoping to turn their business dreams into realities. Here are four reasons why separating your business and personal finances is key to small business success:
1. It’ll help you look legit.
Looks aren’t everything, but they do count for a lot. Imagine hiring a guy to paint your house and meeting him at the end of the day. The house looks great, the guy looks tired, and you pull out your checkbook to complete the transaction.
“Who should I make this out to?” you say.
“Eh, just make it out to me, Bob Bobberson,” says the guy.
The psychological difference between writing out a check to Bob Bobberson versus BB Professional Painting is subtle but important. The first is just some hard-working schmo who maybe paints houses for a living or maybe as a side job–who the heck knows? The second is the proud owner of a bona fide company in competition with other bona fide companies. I guarantee you that the latter will be easier for you to remember when you need painting done in the future
2. It’ll help you establish business credit.
Businesses need financing to grow, and a strong business credit score opens up more financing options so you can get a loan when you need it most. If you can build a good business credit score, you won’t always need to leverage your personal credit to get access to financing, keeping your personal credit protected.
Think of your personal and business credit scores as two paths that–although they may run next to each other–are ultimately independent. Potential lenders will have a much easier time assessing the strength of your business if those paths don’t crisscross and overlap.
3. It’ll help you with taxes.
If filing personal taxes feels like beating your head against a wall, filing an unholy marriage of both business and personal taxes feels like–something much worse. Again, think of those paths running straight, smooth and separate. Confused paths make it easier to get lost, robbing you of both precious time and peace of mind.
Tax deductions are another huge advantage of keeping your business finances separate. You may save money on all kinds of business expenditures, including meals and travel. And don’t forget the long arm of the IRS. Let’s say (God forbid) that your company gets audited. Keeping your personal finances separate from your business books can help ensure that one side isn’t impacted by even an innocent mistake made on the other side.
My company recently conducted a survey of 648 business owners all across this great nation of ours. We discovered that, in the past two years alone, 70 percent of small business owners without a business checking account were rejected for financing. The number one reason that they didn’t have a business account–even if they wanted one–was that they couldn’t find the time.
A word to the wise: Make the time. Begin the process of separating your personal and business finances today. Untangle those paths, and walk confidently forward in the knowledge that a key component in the foundation of your business has been firmly laid.