Separating your business and personal finances may seem like a no-brainer. Still, it can be more challenging than you think, especially if you’re a small business or a solopreneur (a company of one!). While it can be tempting to use a card for everything, there are many reasons you need to keep your business and personal finances separated.

In addition to doing your taxes, tracking things like project spending, business expenses, and even tracking things on a more granular level become difficult and easy to mess up when you have to sift through one long list of expenditures. 

Let’s look at why you need to separate your business and personal finances. 

Why you should separate your business and personal finances

Liability

No one wants to think about what happens if things go wrong or if there’s a legal entanglement with their business, but it’s important to plan for the best of times and the worst of times. If you’re operating your business with your personal account, then you’re leaving all of your personal assets open in the event of legal action. Instead of using a legal entity, like your company, a person will sue you personally, meaning your savings, stocks, personal property, and retirement funds are all up for grabs. Keeping a separate business account means you have separate company assets from your personal ones. This doesn’t mean someone can’t sue you personally for other reasons, but if you have an issue with a customer, employee, or vendor, you’ll be happy you kept your company as its legal entity.

Leverage‍

If you think you’ll need loans for your business, keeping your personal assets out of the equation is essential. Leverage, using borrowing funds to invest, is used often by companies to increase potential profits. It allows you to make small investments that turn into longer-term payouts. Using your personal finances for leverage means you’re putting your personal assets at risk (again: think about your savings, retirement funds, personal property, etc.), which may pay off, but it also may not.

Efficiency‍

Having your personal and business finances mixed causes more work. At the moment, it may seem easier just to grab your personal debit or credit card number to swipe in the store or to use your saved personal card info for online purchase, but, in the end, the time you may save by using whatever card is closest costs time a little farther down the road when it comes to reconciling your spending and filing your taxes. It can also be challenging to juggle your personal finances with client money coming into the mix. Perhaps you get a 50% deposit on a client project, but then you get hit with some sizable personal expenses. It’s easy for that client's money to pay off what you need ASAP, but when it comes time to do the client's work, the money may be gone or greatly diminished.

Taxes‍

Taxes are a whole other can of worms that we’ll be writing about in other posts, but giving a quick rundown: it will be an arduous task for you (or your accountant) to run through a year’s worth of expenses when everything is mixed together. Was that a business expense? Really? It’s hard to remember things from a week ago, let alone a year ago. And if you; 're not keeping incredibly detailed receipts, things tend to blur together. But you know who keeps a close eye on your business spending? The IRS. That last thing you want is an auditor poking through your business/personal expenses. The process is long, very involved, and may include significant fines for you when it's over.

Credibility‍

Not only does having a separate account for business keep things easy to organize, but it lends credibility to your business, no matter what stage it's in. It puts people at ease when they can make a payment to a company instead of someone dealing with business matters.

Easy ways to keep your business and personal finances separate

As we’ve seen in the previous section, keeping your business and personal finances separate isn’t just more efficient, but it could mean the difference between your business dying or thriving, 

Not sure where to start? Here are some tips to get you on the right path.

1.Get a business account

You have your personal account for your personal expenses; now, it’s time to get a business account for your business expenses. Business accounts, like Vergo, offer a more traditional banking structure but with the added bonus of project management tools to help keep you on track.Having a separate bank account and debit card for your business means everything is easier to find, budgets are easier to track, and, come tax time, everything is in its place and easy to reference. Bonus? There are no interest or membership fees because it’s a checking account and debit card.

2. Send detailed invoices to your clients.‍

Managing expectations on a project are crucial to ensuring your clients know exactly what they’re getting. Invoices can go a long way in keeping project outlines and budgets clear but also help maintain a more detailed work record than a receipt would. This helps prevent confusion or delays in payment as long as everything agreed upon is delivered. Be sure to document updates and changes as you go! Sending invoices also strengthens your business’ credibility as it has official billing and paperwork that clients can see and sign. It’s also helpful to have a client's signature on a document with all of the project details in case of an issue.

3. Keep your receipts!

While keeping a giant pile of paper receipts may not be your cup of tea, it can be important if you’re audited, or a discrepancy occurs in your account, and you need to track down more details. Luckily, there are many free apps or tools in your pre-existing account software that allow you to snap a picture of your receipts with your phone and catalog them and store them in the cloud for safekeeping. Remember, your receipts, canceled checks, deposit slips, etc., all validate the information on your tax returns. It’s essential to ensure that your numbers are all back up by corroborating evidence. 

4. Pay yourself. No really

It can be tempting to pull cash from the business to help pay for personal expenses, especially if you’re a solopreneur or work with many freelancers. BUT, experts show that paying yourself a salary helps you mentally distinguish between your personal and business finances and also helps keep you on a realistic budget. Paying yourself a salary is also an easy way to track your income because you’ll have payment details visible as a payment in your business account and as received in your personal.

5. Structure your business

‍You can form several different types of business entities like a partnership, sole proprietor, LLC, or corporation. Establishing your business as a separate legal entity goes a long way towards building trust and credibility for your new brand and a solid foundation to help you keep your business and personal finances separate. 

Do what’s good for your business

If you’re treating your business as more than a hobby, it’s critical to set up a structure in which your business thrives and grows outside your personal accounts. Keeping your business and personal finances separate helps with many important aspects of your business and prevents you from being personally liable in the event of an issue. 

Speaking of business finances, don’t forget to check out Vergo if you haven’t already! It’s the only business financial platform built specifically for your industry. Not only does it include debit cards and an easy-to-use project management app, but it also provides business owners with cash back points on client and business purchases so you can make your money work for you. 

To learn more, check us out at www.getvergo.com.

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