It is critical to separate your personal finances from your business. Once your business is established, we recommend following these rules to avoid accounting and transparency issues in your company:
- Don’t use your personal debit/credit card to pay for business expenses
- If your company is a corporation (Inc., Corp., Cp., etc.), do not transfer money from the business accounts to your personal account.
It is important to be absolutely transparent with your accountant, explain in detail what each expense means so you can label them correctly. However, errors occur frequently. and business expenses can be lost within personal finances, and when these two start mixing up, confusion and trouble begin.
1. You can lose money
If your business expenses start to get lost within personal expenses, you may not be able to claim them as a tax deduction on your tax return. In addition to this, if your accountant must spend extra time separating and classifying these expenses correctly, you will incur into additional costs.
2. Your accounting will become extremely complicated
As we mentioned, managing your company’s finances in a separate bank account will make life much easier for you and your accountant; if all expenses are mixed into the same account, your accountant will have to review your financial statements and decipher which expenses are related to your business. This will cost you hours of work.
3. You may lose legal protection
There is a separation between the owners and shareholders of a company, and the corporate structure, which protects the owners (and their assets) from any lawsuit or legal action that is submitted against the company.
If your corporation is sued, or if it goes bankrupt, this legal protection would prevent the claimants from going against your personal assets to collect any amount of money.
One of the easiest ways to lose this protection is when corporate owners mix their finances with those of their company; this can lead a judge to determine that there is no separation of assets.
Do you need help with the accounting tasks for your business? We invite you to schedule a free call with one of our specialists.