Every business needs finance to operate, grow, and maintain operations. Finance is a crucial component of every organization. As a business owner, it is essential to comprehend what business finance is and how it functions.

Have you ever found yourself in a similar circumstance? You pay all of your bills in one go and, when you return to accounting, find it difficult to understand where your money has actually gone.

Accountability and self-awareness are essential for small business owners if they want to have any chance of becoming financially successful. Otherwise, you will constantly question where your money goes, just like a spectator in the dark. There must be a definite line between your personal and business finances. 

To prevent all of these problems and run your business worry-free, this article will show you how to keep your personal and business finances separate, along with the importance of doing so and a guide on how to achieve separation.

What is personal finance?

The phrase “personal finance” refers to managing your finances, including saving and investing. It encompasses financial planning for retirement, taxes, estates, banking, insurance, mortgages, and investments. The phrase is frequently used to describe the entire sector that offers financial services to people and households and provides them with financial and investment advice.

How you approach the aforementioned matters is also influenced by your individual goals and wants, as well as a plan to meet those needs within your means. Being financially smart is crucial if you want to maximize your earnings and savings, as it enables you to distinguish between good and bad advice and make wise financial choices.

What is business finance?

Business finance refers to a business’s funds or financing. It involves two main components: raising funds and effectively managing finances.

Funds can be raised from a variety of sources or methods, including:

  • Self-financing or bootstrapping by the business owner
  • Business loans
  • Government funding is provided through MSME credit programs, etc.
  • Profits and cash flow for the company
  • Expenditures made by businesses
  • Managing finances entails budgeting, controlling spending, monitoring expenditures, analyzing investments, assessing risks, anticipating finances, etc.

Why is it important to keep personal and business finances separate?

Keeping personal and business finances separate is crucial for increasing your income, regardless of the size of your business. There are several justifications for doing so:

1. Liability Protection

If your personal money and corporate finances are mixed up, your personal assets may be at risk if your company is sued and assets need to be seized to either repay a debt or settle a lawsuit.

This is particularly valid if you run a sole proprietorship, non-limited partnership, or non-limited company when the firm and its owner(s) are the same legally. 

Therefore, you can protect your assets.

2. Streamlined Financing and Accounting

Many small businesses rely on loans to grow, pay for restricted cash flow, complete large orders, and other things. You’ve already taken out one loan or another to increase the likelihood that your company will turn a profit. 

Lenders often analyze your business records to evaluate how much you can qualify for, whether you even qualify, and how dangerous of a borrower you are. 

Your prospects of obtaining the loan you require to make your business profitable may be compromised if your personal and business finances are mismanaged, you continue to use business income for personal expenses, etc.

3. Better Recordkeeping

Being at least disorganized means mixing up your personal funds and business. You may need to keep accurate records of how your company is doing, particularly regarding potential expansion. 

When personal requirements arise, you are inclined to lose track of your professional deliverables. Since personal demands can seem more essential than professional ones, you’ll undoubtedly need help prioritizing your needs. 

Using business income for personal expenses could cause severe cash flow issues that could endanger the very survival of the company that is designed to provide for your needs. 

4. Building Business Credit History

Due to the ease of obtaining funding and the potential for better vendor terms, new enterprises must establish credit. Building credit begins with registering your business, creating a business bank account, and creating a bank, credit card, and vendor accounts, regardless of your company’s legal structure. Also, remember to make your payments on time to have a good credit score.

How to keep your personal and business finances separate?

Many first-time business owners need to become more familiar with the multi-step process of separating business and personal funds. We have listed instructions to assist you in getting started. Whatever type of business you run, you’ll want to take the following steps to guarantee that your personal and corporate finances remain separate.

Register Your Business

The first step is registering your business by deciding your business entity type. According to your business entity type, you can choose between an LLC and a corporation (forming a single proprietorship does not require an EIN). Creating an LLC or corporation will make your company a distinct legal entity. Also, incorporation provides your company with a layer of legal protection and enables you to file your business tax returns independently from your personal tax filings.

Obtain an Employee ID Number (EIN)

You use it to file your business’s income tax return and payroll tax return, determine your company’s legal status, create a business bank account, apply for a business credit card, and many other things. Imagine it as your social security number for businesses. Your social security number won’t be required after you have an EIN, helping to draw a preliminary distinction between your personal and business finances.

Open a Business Account

A business bank account is the most crucial requirement if you want to start keeping your personal and business finances apart. Choosing to open a business checking or savings account is entirely up to you. But given that a business checking account is the bedrock of any organization’s financial structure, we’d advise opening one first. 

Suppose you have a specialized company checking account. In that case, you won’t need to operate only on cash or use funds from your personal bank account to pay bills, deposit cash, collect invoice payments, or make equipment purchases. 

Get a Business Cash Card

Getting a business debit card or credit card allows you to avoid using personal accounts for business transactions, and it’s an easier way to keep your personal and business finances separate.

Cheqly offers small businesses both physical and virtual VISA debit cards. So, You can get a physical card right away for in-person purchases and a virtual card for online transactions. This makes it easy to keep your business finances separate from your personal funds.

If you have a business credit card, you can pay your bills on time, which can help you build a strong business credit score. This makes it easier for you to borrow money for your business and get loans with lower interest rates.

Keep your Receipts Separate

Make sure your personal and professional receipt storage locations are separate from one another. The IRS would want to review your business receipts during an audit, so you’re in danger if you can’t distinguish them from your personal receipts. 

Set a Budget for the Business

Have a set limit on how much you will spend in the month or as per the business requirements. In this manner, you can set a limit on your spending.

Pay yourself a salary

Setting up a formal separation between your personal and corporate money by paying yourself a salary from your company. Simply transfer money once or twice a month from your business bank account to your personal checking account, just as if you were working for someone else. Instead of just drawing money whenever you need it, you may plan when and how you will withdraw funds from your firm by paying yourself a wage.

Know your Business Expense Separate

You should know the following situations if you work from home, travel to client meetings in your personal vehicle, or communicate with clients on your phone. You’ll be able to deduct some or all of those costs during tax season if you can keep track of when you use personal products for work-related purposes. Therefore, familiarize yourself with what costs qualify as company expenses and what don’t. When it’s time to file, take notes and deliver them to your accountant.

As a small business owner, you must separate your home and your office, along with separating your finances. Tell other members of your business to separate personal and business finances. It won’t matter if you keep your personal funds separate from your corporate finances, but other employees don’t. An integrated effort is required. So make sure everyone is aware of the distinction between a business expense and a personal expense, and then devise a system to make it as simple as possible to separate personal and corporate finances.

What Kinds of Businesses Need Separate Business And Personal Finances?

The distinction between personal and corporate money is necessary for corporations and limited liability companies (LLCs) but not for sole proprietorships. Because sole proprietorships are regarded as unincorporated legal entities, they are not required to separate their finances. This implies that the owner has full responsibility for the sole proprietorship’s gains, losses, and debts.

Ironically, this underscores the necessity of a sole proprietorship keeping its business and personal finances separate. It is your responsibility to declare your business expenses and income if you are subject to an IRS audit. Therefore, sole proprietors need to keep their personal and corporate finances separate.

Keep your business and personal finances in check with Cheqly!

The success and expansion of your small business depend on your capability to effectively manage your finances while maintaining a balance of personal and business requirements. Implementing the appropriate finance management practices can significantly alter the course of your business, as we have learned from our experiences.

Take the steps to separate your personal and business finances with us, whether you’re just starting out or seeking to optimize your current financial management processes. With Cheqly, you can easily open your business account and access customized services tailored to your business requirements. Contact us today to enjoy the benefits of financial separation.

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Join Cheqly

Never miss any payment or leave your company without an opportunity to keep rolling.

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