76: Mixing Business And Personal Funds Leads To Disaster Whether You Are Starting A Business
76: Mixing Business And Personal Funds Leads To Disaster Whether You Are Starting A Business, You Are Self-Employed, A Solopreneur, Entrepreneur, Mompreneur, Business Owner, Side Hustler, Freelancer, Bookkeeper, Virtual Assistant Or VA
One of the biggest mistakes business owners make when they are starting their business is to mix their business and personal funds together. It may seem like this is the easiest and most straightforward way to manage their business finances, but in reality, it creates additional work and complexity for the business owner, which is a costly mistake. Your time is valuable, and you don’t want to spend hours trying to figure out what was a business transaction versus a personal transaction, and if you have an accountant or bookkeeper doing your bookkeeping, you’ll find yourself paying additional fees to have them sort through this issue as well. In today’s podcast episode, I will give you the top reasons you need to separate your business funds, when the best time to create separate accounts is, and how to develop procedures to easily separate your business and personal funds. Keeping your business funds separate from your personal funds is recommended and required for many businesses. It doesn’t matter if you are a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA, listen in to today’s podcast episode so that you know exactly what you need to do to keep your business and personal funds separate. I will even cover how you can pay yourself from the business the right way and not get yourself into trouble when it comes to tax time. These tips are essential whether you are using a computerized software system like QuickBooks, Xero, Wave, or FreshBooks for your business finances; or doing your bookkeeping manually with an Excel spreadsheet or even a Google Document…
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Show Notes:
One of the biggest mistakes business owners make when they are starting their business is to mix their business and personal funds together. It may seem like this is the easiest and most straightforward way to manage their business finances, but in reality, it creates additional work and complexity for the business owner, which is a costly mistake. Your time is valuable, and you don’t want to spend hours trying to figure out what was a business transaction versus a personal transaction, and if you have an accountant or bookkeeper doing your bookkeeping, you’ll find yourself paying additional fees to have them sort through this issue as well. In today’s podcast episode, I will give you the top reasons you need to separate your business funds, when the best time to create separate accounts is, and how to develop procedures to easily separate your business and personal funds. Keeping your business funds separate from your personal funds is recommended and required for many businesses. It doesn’t matter if you are a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA, listen in to today’s podcast episode so that you know exactly what you need to do to keep your business and personal funds separate. I will even cover how you can pay yourself from the business the right way and not get yourself into trouble when it comes to tax time. These tips are essential whether you are using a computerized software system like QuickBooks, Xero, Wave, or FreshBooks for your business finances; or doing your bookkeeping manually with an Excel spreadsheet or even a Google Document…
Welcome Back…Keeping your business and personal funds separate is a must whenever you have a business. I’ll even take this a step further and say that if you have multiple businesses, you need to keep each of your business entities separate from each other as well. As soon as you start to have income or expenses in any business that you are starting, you need to have separate bank accounts, and you need to keep your personal funds separate from these funds. If you are just getting started with your business or your side hustle, make sure you set up a separate checking account and a separate credit card for your business as soon as you can. If you are listening to this podcast, and you have already started your business, and you are still using your personal accounts for your business, I would highly recommend you get your business accounts set up as soon as possible.
You might think it is just so much more simple to use your existing personal bank accounts. I agree that not having to open a separate bank account for your business would be easier, but as your business grows and you have more and more transactions, I promise when you have just your personal bank account, this will cause you frustration, legal and tax issues as well as a lot of wasted time. Take the time, set up your business accounts as soon as you start having money coming in and going out of your business, and you will be set for the duration of your business.
Let’s talk about a few of these issues. First, I’ll touch on the amount of time you waste when you have your personal and business accounts combined. When you have a business, you need to account for all the money coming in and going out of your business. This, in a nutshell, is your bookkeeping. Imagine for a minute that you have all of your business and personal income and expenses in your personal account. You will need to sift through all of your transactions just to find which ones are specifically for your business so that you can have an accurate accounting of your business finances. If you have many personal transactions, this could take up a fair amount of time. More importantly, I always recommend you reconcile your accounts, and when you are utilizing a computerized software system for your bookkeeping, you would need to record all of your personal and business transactions so that you can reconcile your account. Each of your personal transactions are transactions that you would not need to record if you had a separate business account and only used this account for your business transactions. Not only will you save time by separating your business and personal funds, but if you hire someone to help you with your bookkeeping, by keeping your personal funds out of your business accounts, you will save money since your accountant or bookkeeper does not need to record each of your personal transactions in addition to your business transactions. I have had business clients that I worked with that mixed their personal and business funds together, and when I was recording their transactions, the personal transactions made up more than 75% of their transactions. Their monthly billing from me could have been reduced significantly if they had kept their business and personal funds separate.
Generating reports for having your tax return prepared for your business is also a much easier process when you have your business and personal funds separated. Not only will you be able to generate the financial statements that you need to have your tax return prepared with all of your business transactions in one place, but you will also be setting yourself up for success if the IRS ever audits you. When you are commingling your business and personal funds, the IRS may want to not only look into your business transactions further, but they may also want to dig deeper into your personal transactions as well. This could open up a personal tax audit and cost you additional time and money.
Speaking of commingling business and personal funds, when this is done, there is a chance that you are piercing your corporate veil if you have set your business entity up as a corporation. Most businesses will set up a separate corporation to reduce liability and keep their personal assets out of the business. When you commingle your business and personal funds, you could be opening your business up for additional liability issues when you have pierced your corporate veil. Make sure that you set up separate bank and credit card accounts so that you can keep your original intentions when you decided to incorporate your business.
When you have your business and personal funds separated, it is easier to see an accurate picture of your business cash flow. You can easily monitor your cash flow when you only have your business income and expenses flowing in and out of your business checking account. If you add personal income and or expenses into this account, you take away the simplicity of knowing how much cash you have available just from the activity of your business.
One question I often get from clients when they diligently separate their business and personal funds is how they should pay themselves or take money out of their business to pay for their personal expenses. I’ll start by saying that if your business is set up as an S-Corporation, you should be paying yourself a reasonable wage from the corporation. This would be done by processing payroll for yourself and withholding the appropriate payroll taxes. These payroll expenses are included on your business's profit and loss or income statement as an expense. If your business is a sole proprietor or a single-member LLC, you can easily pay yourself from the business, and you would record these payments to yourself as an owner’s draw. An owner’s draw is not recorded on your profit and loss report or income statement. When you are a sole proprietor or single-member LLC, the total net income from your business is computed and reported on your tax return.
I know it may seem like separating your business, and your personal funds will be causing you additional work, but I promise in the long run, you will be much happier with the outcome and the extra time and money you will save overall by having your funds separated. This doesn’t need to be hard, you simply set up the separate accounts, and once you get in the habit of only utilizing the business accounts for your business funds, you’ll feel more in control of your business and your business finances. If you feel like you need some additional help with keeping your business and personal funds separated, I’m inviting you to schedule a free consultation session where we can go over any questions you have regarding your business finances. You can go to www.FinancialAdventure.com/Contact-Us and schedule a time that works well with your schedule. During your consultation session, we’ll work together to go over any questions you might have regarding your business, as well as where you currently are in your business and where you’d like to see yourself and your business in the future. We’ll also go over my MASTER Your Business Foundation Diagnostic Assessment so that you can fully understand your strengths in the foundation your business is built on. I only offer a few of these one-hour consultation sessions each week due to the time commitment, and I am looking forward to talking with you soon. I’ll post links to these and other valuable resources for business owners and bookkeepers where you are listening to this podcast and in the show notes.
And, you know I’m going to ask…what’s at least one thing you will take away from this episode that will help your business succeed and grow your bottom line? If you need some accountability, join our PRIVATE Facebook community and post your action item, we’d love to support you.
