Separating Personal and Business Activity

“Keep your personal and business finances separate” 

Keep Things Separate

There are important financial, legal and tax reasons to separate your business and personal finances:

• Financial. It’s difficult to know how well your business is doing if you can’t easily eyeball a bank balance devoted to your company. You may run into cash flow problems using a single account for business and personal expenses. Also, having a separate credit card for the company helps to build business credit scores.
• Legal. If your business is a corporation or a limited liability company, you can lose the personal liability protection you sought by setting up such an entity by co-mingling your finances. The reason: If you don’t respect the separate legal status of the entity, creditors may not have to and can go after your personal assets to satisfy their claims. There’s a legal doctrine called “piercing the corporate veil,” which means courts can ignore your entity’s status for purposes of your personal liability for any claims against the business if you haven’t observed the formalities of a separate business entity.
• Tax. For federal income tax purpose, the law requires you to keep good books and records. This can only be done if you have a business bank account into which you deposit income and from which you pay expenses. A rookie mistake is thinking you can remember what expense is for business, such as a meal, when it comes time to prepare your tax return; you can’t — and it can cost you tax deductions!

How to Keep Finances Separate

To keep your personal and business finances separate, you should maintain separate of each of the following:

• Bank Accounts
• Credit Cards
• PayPal Accounts
• Accounting System
• Invoices

All that is needed to keep your business affairs untangled from your personal money matters is to have a separate business bank account and a separate business credit card. If you choose to use PayPal, also set up an account for your business