Starting a business is hard work. There are so many things to take care of when setting up a new business that it can sometimes be tempting to take a shortcut wherever you can find one.
Many entrepreneurs tend to skip opening a separate bank account for the business, assuming it’s just a bureaucratic requirement. They plan to do it further along the road, perhaps when they start earning revenue, but just don’t see it as a priority. In our experience, this approach is ill-advised.
Why it’s crucial to keep separate accounts for you and your business
There are many ways in which separating finances can be beneficial for both you and your business. In the long run, the hour you’ll spend at the bank setting up the new account will save you time and, more importantly, a major headache when organizing your books and managing your business.
Here are five reasons why you should always separate your business and personal account.
Reason #1: It’s easier on your bookkeeper (even if that’s you)
Having separate accounts means you can pull up your business’s bank statements and get a complete picture of all money coming in or out. This makes keeping your books in order so much easier because don’t have to constantly check each transaction to find out whether it’s related to the business or not.
Simpler bookkeeping means you and your team will be spending less time on accounting and more time on growing the business. If you have an accountant, this can still translate into significant savings in billable hours.
Reason #2: It provides legal protections
If your business is incorporated as a limited liability company (LLC) or a corporation, you are generally protected against personal financial liability. In other words, if your business runs into debt or is sued, your private assets—including your home, bank account, car, or any other property—cannot be seized.
However, if you don’t keep separate accounts, it may be difficult to tell what is owned by you and what belongs to the business. This means your corporate veil may be pierced, eliminating this vital protection and opening a door for creditors to go after your personal assets.
Reason #3: It simplifies your taxes
Having separate accounts makes validating business expenses easier and less prone to error. This means it’s not as likely to get you in trouble with the authorities when filing your tax returns because distinguishing between business and personal expenses is straightforward.
Even in case of an audit, if your business accounts are separate (with absolutely zero exceptions), your personal finances will probably be left alone.
Reason #4: It gives you more control
Separating expenses allows for better tracking of your business’s financial situation. A simple glance at your bank statement offers a clear picture of your expenses and income at any given time.
Since you know everything you have in the account belongs to the business, it’s also much easier to maintain a healthy cash flow. It’s always clear just how much cash you have available for your business’s operation at any time.
Reason #5: It makes it easier to secure financing
When you’re expanding or just going through a temporary rough patch, you may find your business is in need of a cash infusion. Whether you’re looking for a loan or an investment, whoever provides you with funding will have to perform due diligence to make sure your business finances are in order.
Having separate accounts immediately puts you in a better position for this process and makes you look much more professional. As with taxes, it makes it easy for the auditors to validate the business’s financial situation, expenses, and revenue. And, it keeps your private life private, so you don’t have to explain every item you purchase for yourself, which can be embarrassing.
Do yourself a favor
Separating your personal and business accounts can make your life much easier and only requires a trip to the bank. We can assure you it’s worth it and your future self will thank you for making the effort.
If you're looking for even more ways to simplify your day-to-day as a business owner, check out Melio, a free tool for managing accounts payable and receivable. Sign up for Melio today to start sending and receiving business payments online within minutes.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.