When the office cubicle is your couch, and the break room is your kitchen, the lines between your personal and business life can get blurry.
But that’s the beauty of being your own boss. You get to work the hours you want. Plus, you can collaborate with the clients who value the results you bring to the table.
But there’s one line in the sand I’d like to draw for you.
When it comes to finances, you shouldn’t mix personal with business.
There are many reasons to keep those finances separate, but we’ll focus on the big kahunas: professionalism, protection, and taxes.
First, what does separating your finances look like? Here are a couple of ways:
- You can incorporate your business
- Open up a business bank account
- Invest in bookkeeping services
- Pay business expenses with your business account
- Pay personal expenses with your personal account
- Retain capital in your business account for future investments
- Pay yourself a salary by transferring money from your business account to your personal account
Okay, so you know what that separation could look like. Now, let’s talk about the why.
You’ll Have a Snapshot of the Financial Health of Your Business
If you checked your bank statement today, could you determine the financial health of your business? For example, what are your expenses and cash flow? What are your monthly earnings?
Maybe not. It’d take you hours to sort personal expenses from business expenses.
Keeping finances separate, from day one of incorporation, gives you a clear idea of the financial health of your business. You can make decisions on how to invest in new opportunities, or you can budget to offset the slow season.
This also demonstrates you’re a professional business owner, not a hobbyist to both your clients and the IRS.
Protect Yourself Against Lawsuits and Audits
Imagine your business is the world’s rarest diamond (cause you shine bright, girl). And there’s a protective security shield around that diamond.
When you take financial steps, like incorporating, that shield is a protective measure for your assets. Incorporation and separation of finances also give you a clear paper trail to prepare your business for IRS audits.
But every time you mix the two, you poke a hole in that shield. This allows lawsuit seekers and auditors to get one step closer to your home, investment funds, and other assets.
Maximize Tax Deductions (including ones you probably didn’t know about)
Did you know you can deduct coffee from your taxes? Yup–that’s right. But before you head to Starbucks, this only works if you can prove it was a business expense and not an indulgence.
If your personal and business accounts are merged, the IRS will raise that red flag high.
By separating your finances, you can identify what expenses are eligible for a deduction.
But these reasons are just the tip of the iceberg when it comes to the various benefits you’ll get when you separate your finances.
How do your expenses look this year? Comment below with any exciting tax deductions you uncovered!