Tracking Your Business Life and Personal Life I saw this infographic from TD Bank® on Small Business Trends the other day about and it surprised me. Here is the link to the information they shared
Tracking Your Business Life and Personal Life
I saw this infographic from TD Bank® on Small Business Trends the other day about and it surprised me.
Here is the link to the information they shared about a survey they had done asking small business owners about their bank account.
27% of those surveyed used the same bank account for both business and personal
I’m sure a lot of those people just feel it’s easier to have one bank account. In the long run they are just asking for trouble. I did a podcast episode on this called Stay Out of Hot Water: Keep Business and Personal Records Separate. The link is here if you would like to have a listen.
In it I explained many reasons why you should not comingle your business and personal information. In the episode I was concentrating a lot on records in general but the first place start is your bank account!
If you are part of the 27%, here are a few reasons why you need to rethink your approach:
- Legal – your legal entity can be challenged in a dispute. Comingling your personal and business finances can give rise to the idea of “piercing the corporate veil” and create unexpected liability for you personally. You can read more about it here. The combining of business and personal finances is a bad idea.
- Liability – this idea of piercing the veil can place a lot of risk on you. Let’s say you perform a service for someone in their home. Let’s say you do something wrong and it leads to damage to the home or injury. If you had them pay you personally, who do you think they are suing for the error in workmanship? You and your business!
- Creating a red flag for taxing authorities. The IRS looks for red flags while they are auditing a business or a taxpayer. If you run a small business there is a higher chance that you are audited than if you didn’t. During an audit, if the auditor discovers that you use the same account for both, it opens up a lot of questions. Chances are they may review the deductions that you’ve claimed. It’s not worth it; separate your business and personal financial accounts.
- Professional Reasons – From a customers’ perspective, most people like to do business with a business, not someone who is running a hobby on the side. Having them make out checks to you personally can send a message that you are running a hobby. It may trigger a question in the customer’s mind about how serious you are about your business and the service you provide.
- Sanity Reasons – If you hate getting your tax information together, part of the reason may be that you have created a mess all year long. You have to sift through personal expenses, many of which are not deductible, to get clean financial information about your business. That takes a lot of time and energy and you may make some costly mistakes.
What You Need to Do Instead
Start to get this under control now to limit your exposure. First, open a separate business account. While you’re at it, open up a separate business credit card account if you don’t already have one for your business.
Your financial records will be effectively kept at the “transaction point”. For example, if you have to make a purchase for your business, the business credit card receipt or the check you cut out of your business accounts is evidence of the business transaction. Your new business accounts receipts and cancelled checks act as business records.
Don’t deposit business checks into your personal account. If you need to take money out of the business for your personal expenses then take a salary or take a draw. More importantly document the transaction in your business.
And finally, don’t pay personal expenses with your business credit card or bank account. As mentioned above, take a salary or take a draw and document it.
It’s Just a Bad Idea
Combining your business and personal accounts is just not a good idea. It opens you up to too many negative risks in your business that can prevent the success you want for your business life and personal life!