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Separate Business and Personal Finances to Avoid Commingling

What is Commingling?

According to Investopedia, commingling refers to “the illegal act of combining client money with personal money without contractual permission to do so”. By mixing personal and business funds, this action could lead to unfortunate consequences, such as letting the business go. Here are a couple of examples of commingling:

  • Paying for a personal vehicle on the company credit card

  • Paying for student loans using the business account

  • Planning a vacation on a business credit card

These are all considered commingling and bad practices that no business leader should get into if they want to keep their business up and running. Here's a quick video for more on how commingling can hurt your business.

Why It’s Important to Separate Business and Personal Finances

To some people anything that involves taxes, they get stressed out. So adding commingling to that, further complicates the process, especially if the IRS gets involved. If your business gets audited, the IRS dives in and analyzes to make sure each transaction is business-related. If not, you can get in serious trouble if there’s no proof to be validated.

Business Credit

Freelancers, entrepreneurs, and business owners should consider establishing business credit as an important step being in business. Why should having a good business credit matter? It is similar to what you would imagine as the benefits of building personal credit. Nonetheless, here are a few benefits of opening a business line of credit:

  • Having good business credit puts the business in a good situation when looking at payment terms with other vendors and suppliers

  • Good business credit puts the business in another beneficial position to receive better interest rates and credit terms from lenders and banks

Save Time and Money

Keeping both business and personal finances separate will save time and money for both business owners and bookkeepers. For bookkeepers, there is no way of determining for sure between business transactions versus personal expenses. This goes back to the point of when a business gets audited, there needs to be proof that an expense was used for business purposes.

Tips to Keep Business and Personal Finances Separated

Open a Business Credit Card

As we mentioned before how it’s important to start building business credit, here are just a few of the initial qualification steps to get a business credit card:

  • Have a defined business

  • Check personal credit

  • Research which best business card is right for you

  • Gather all the information and documents needed

Pay Yourself A Salary

In our previous blog, we discussed the importance of business owners paying themselves a salary. When business owners do not get on payroll, lots of numbers get skewed, especially on the Profit and Loss Statement. As well as when it comes to employer taxes, there could be penalties that have to be paid. Payroll affects every aspect of a small business from the morale of employees to the financial stability of the company. It’s important to consistently pay yourself to avoid fees and be offered benefits.

Hire a Professional

Worst case scenario, hire a professional. If you don’t feel confident in handling financials, you should highly consider hiring some financial assistance. Doing this may even help you save money in the long run and help create and meet those business goals. Contact us today for a free consultation on your business’ bookkeeping needs and how we can help.

Don’t Commingle, Do Separate Business and Personal Finances

Develop good healthy habits early on with your business and keep business transactions disconnected from the personal costs. This ultimately helps save money and time for the distant future of you and your business. Hiring a professional can be more cost-effective than handling all the financial endeavors on your own.

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