If you’re an entrepreneur, or thinking about becoming one, it is vital that you keep your business and personal finances separated, that is, if you ever want to write off those business expenses. I’ve found that it is almost always easier to set up this separation at the start before generating any business transactions. Trying to separate everything out after the fact can become a nightmare very quickly! Let’s discuss why it is important that you separate business and personal, what some of the challenges are in doing so, and some solutions to make it easier.
Why It's Important
IRS and Taxes
The first reason that comes to mind when considering the separation of business and personal expenses is the the IRS. If you’re making money, they want their piece of it. So, you want to be able to write off any eligible expenses, thereby lowering your taxable income. However, you can’t simply write off everything you spend. According to the IRS, “To be deductible, a business expense must be both ordinary and necessary.” They also clearly state that personal expenses are not deductible. So, if you want to maximize your tax deductions, you’ve got to be able to tell which is which. And you need to be able to prove it if you’re ever audited, because they’re watching you…
Business Cash Flow
When operating a business, usually you want that business to be profitable. Tracking cash flow is a vital part of making sure that happens. It allows organizations to have better visibility into their finances, so they can plan for future expenses, investments and growth opportunities. Additionally, it helps businesses ensure that they are able to pay their bills in a timely manner, by avoiding overdrafts and other financial problems. If your business transactions are all commingled with your personal transactions, it will be impossible to tell how your business is doing with any degree of accuracy.
There are many different legal business structures such as limited liability company (LLC), s-corp, c-corp etc. I’m not going to get into the specifics of all that, but I do want to touch briefly on LLCs. One of the benefits of an LLC is that it separates the liability in your business from your personal assets. For example, if you have a rental business that is an LLC and someone sues the business for whatever reason, they wouldn’t be able to take your personal assets, it would just be limited to what’s in the business. Per Chris Wong, head of Small Business Product with Bank of America, “With an LLC, ‘generally no one can come after your personal assets’.” Please note that I’m not an attorney and this isn’t legal advise. I recommend you consult a professional for liability questions. What I’m trying to say is that your LLC isn’t going to do any good if your business and personal transactions are all mixed up together.
Some Hurdles in Separating Business and Personal
Why do many entrepreneurs neglect to separate their business and personal finances from the start? Keeping accurate records and accounting may sound intimidating, but it doesn’t have to be. They may also not want to take on any additional expenses until their business is actually producing income. Business banking is expensive, right? Wrong! There are a number of free commercial banking solutions out there. We will discuss one of them below. There are also free and cheap bookkeeping/accounting solutions out there such as Wave Accounting and Quickbooks Online (QBO).
“But won’t opening a business bank account and tracking all my business transactions separately add a lot of extra work? It’s simpler to just run everything through what I already have.” Sure, it will add a little extra work right at the start. Not near as much as you may think though. However, I can guarantee that it will save you much more time and stress later down the road.
Banking with Relay
Relay is a completely online, commercial banking solution. There are no account fees or minimum balances and you can open up to 20 checking accounts. You don’t have to physically go to a bank and sign a document every time you want to make a change. It also allows you to easily share your financial data with your accountant or bookkeeper without having to share your own login information (which no one ever does…). You can even pay bills by having Relay mail checks out for you. You do have to pay a fee to send a wire, unless you go for Relay Pro. For $30 per month (as of 01/26/23) you get free wires and a complete Accounts Payable (AP) solution. It’ll sync your bills from QBO and even provides multi-step payment approvals.
You may be reading this and wonder, how much do I get paid for every customer I bring to Relay? The answer is $0. There isn’t some kind of commission or anything like that. I’m just always looking to streamline my own systems and processes. If one of my QBO clients also uses Relay, it just makes my job easier. Win win for everyone! I even worked through some training to become a certified banking partner with Relay to better serve my clients.
I hope after all that, you’re no longer on the fence on whether you should separate your business and personal finances or not. If you’re just starting up your business, lay a strong foundation now that will last you for years of growth to come. If you’re already running a business and everything is mixed together, it’s not too late. The longer you wait to separate everything, the harder it’s going to be. Act now to get it cleaned up and set yourself up for success. If you don’t know where to start, reach out to me. I’d be happy to help. I’ll even give you a free analysis of your situation with recommendations on next steps to take. Then you can take that and run or work with me through the process to get you where you need to be.