Why do I need to separate my personal and business financials?

Hello to my fellow Entrepreneurs and welcome to another fantastic read to help bring your financial goals to reality. It’s your favorite Money Motivator – Growth Instigator, Erica Fields bringing you the keys to your financial house!! I hope you are enjoying this day and are receiving all the fruits of your labor.  

Today’s topic focuses on the importance of separating personal and business financials. Often times, we do not want the hassle of searching for a business banking partner, but it is a necessity in the process of starting a business. Before you open your doors, you should have your business formation completed and business EIN establish with the Internal Revenue Service. Once these steps have been completed, you should open a business checking account for your company.

Corporate Veil

My clients will probably tell you that I preach this far often than they care to hear but separation is key. One of the golden rules of small business finance is to never combine business finances with personal ones. Before you even open your doors to the public, you should first open a new checking accounting for your business. It's imperative to growth and supports the legal veil of a business entity and its owners. This ensures that funds taken in by the business are used expressly for business purposes.

If you expect to be in business for longer than a year, you should expect that a time may arise when a customer or client, or even a stakeholder, is not pleased with the performance or effects of your practices. Should they seek legal action, having an LLC or another business entity formed is not the only way to protect the owner’s personal assets. Using business funds for personal use, or even comingling the two in the same account will quickly diminish the legal separation and subject personal assets of the owner or owners to suit.

Cash Flow and Financial Planning

Small business owners have a responsibility of cash flow management. The expenses of the business should be paid by the income earned by selling products and services. Included in these is expenses are payroll expenses included for the owners. Should the owner need to use business funds to pay for personal expenses, there is a possible opportunity to increase his or her pay.

When the personal and business financials are separated, management can make better cash flow decisions. It is quite difficult to plan financially for spending when you comingle business and personal expenses in the same account as personal habits tend to be less predictable then that of the business. Once a salary is set for the owner, he or she will need to commit to living within those means and should not rely on excess funds of the business for personal matters.

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