Personal and business accounts are supposed to be kept separated even though the common person is you. Initially, managing two separate banking accounts may seem challenging to you, but eventually, you’ll understand the importance of this segregation.
This article explains the top most significant reasons for keeping both your accounts completely separate. Read through subheads to understand the issues in detail.
Best Reasons To Have Separate Business & Personal Accounts
Although some solopreneurs find comingling the accounts beneficial and straightforward, later situations may arise, leading to a complicated mess. Therefore, a pertinent question remains whether simplified banking is better or the complexity in the long run. Let’s here understand the good things that can happen on keeping the bank accounts separate –
- Clear tax audit
Imagine your personal and business banking transactions occur through the same account. It means you need to submit your personal financial statement during audit alongside the business revenue and expenses. This makes auditing more complicated, and hence, chances of mistake increases. For a clean audit report, you must ensure that your personal and business banking accounts are discrete.
- A much improved VC and IPO financing Visions
Personal and business-related transactions must be handled differently from each other, and every step must be according to the rulebook. It is especially important for startups looking forward to raising VC or exit via acquisition or IPO.
However, you can have both your personal and business accounts in the same bank as long as there is no other complication involved. In fact, having both accounts in the same bank is also helpful as you’ll get added benefits, and the management time reduces marginally. But make sure your business account and transactions are always your priority.
- Improves business credit
In the initial days, having a single account for personal and business purpose may seem easier. But complications arise as transactions increase. That’s why financial advisors recommend separate account for business-related transactions. Also, it will help to build business credit.
With separate accounts, tax audit will be clearer. Therefore, your business credit score will be in a better place eventually. Others will thus find your business entirely legitimate while making any payments. In fact, some creditors tend to raise brows in offering personal loans if your personal account is a business account.
- Keeps your business away from personal liabilities
Your personal liabilities will reflect on the business account if the transactional medium is the same. You don’t want your personal credit score, taxation, and other liabilities to affect your business and drop its credit score.
Additionally, accurate management of accounts and record-keeping gets complicated when your personal and business accounts are the same. It often leads to tax reporting challenges. During the audit, this may result in a severe problem.
- Better revenue and overhead tracking
With the same account, you may not be able to realize your revenue from the business accurately. But this tracking is more essential than you accomplish. Without a proper understanding of business revenue, you won’t be able to make business expenses appropriately. Sometimes, you may not even realize over expenditure from business accounts and thus end up in loss or debts.
Also, account receivables and payables become hard to differentiate. So, make sure you are not combining your personal and business accounts at any cost.
- Budgeting and forecasting becomes easier
When you have a dedicated business account, it becomes easier to forecast your budget for the coming year. This is because a separate bank account gives you a clear insight into business expenditure, overspending, revenue, loss, payroll, account receivables and payables, etc.
Needless to say, combining accounts can expose you to tax complications, IRS penalties, and personal liability for any outstanding business debts.
- Clean accountancy and bookkeeping
Keeping your business account separate from your personal account gives you a better insight into business transactions. Hence, bookkeeping gets easier. Mixing them both can affect the business books, thereby disturbing your business financial statement, tax return, and overall accounting.
Also, it will be difficult for you to handle your personal debts. With both the accounts being the same, you won’t get personal loans with no credit check. Business accounts are constantly subjected to credit check.
- It helps to get a clear vision of profitability
Your personal transactions get mixed with business expenses if both the accounts are same. Therefore, you cannot clearly understand the revenue generating from business production. As a result, it will be critical for you to judge the profitability and success of your business.
Apparently, getting hold of business financing becomes simpler. Also, cash flow planning and critical financial decision-making get less stressful.
The Ending Remark
Understanding business transactions, cash flow, over expenditure, and revenue becomes easier when you have separate personal and business accounts. In fact, it helps in clear bookkeeping, accounting, and tax auditing. Also, your personal debts and liabilities never affect the financial health of your business. Hence, be wise to have two different accounts, respectively dedicated to personal and business-related transactions.