Are you a tax professional who still mixes your personal and business finances? If so, you’re putting yourself at risk of a whole host of problems, including tax audits, financial liability, and even legal trouble. In this article, we’re going to discuss why you need to have separate banking and credit card accounts for your business.
Background
Having separate bank accounts and credit cards for your business is not just good practice but it is essential due to various reasons. First and foremost, separate bank accounts and credit cards your business allows you to maintain a clear financial boundary between your personal and professional life. Mixing personal and business finances can lead to confusion, making it complicated to track business expenses accurately. Having linked finances for your daily life and your company becomes challenging when determining your business’s profitability, as well as tax preparation, and efficient cash flow management. So what else will having separate accounts do for your business?
Financial Forecasting
Proper financial management is essential to a business’ profitability and sustainability over the long term. Keeping a separate bank account for your company will allow you the chance to organize both associated revenue and expenditures. This separation makes forecasting, financial planning, and budgeting easier. Additionally, by maintaining separate accounts, you can quickly evaluate the financial health of your company and take sound decisions.
Likewise, there are many benefits to having a separate credit card account for your business. For instance, it facilitates expense tracking while diminishing the chance of spending too much money. Not to mention it is more accessible to identify any errors or fraudulent transactions when all business expenses have been recorded on one card. By doing this, you may increase transparency about finances while lowering the chance of fraud in your company.
Establishing Business Credit
A corporate credit card can provide you the ability to help establish and improve your company’s credit history. A positive credit history is vital for securing loans or credit lines in the future, which can be essential for business growth and expansion. Without a separate business credit card, your personal credit could become entangled with your business’s credit history potentially affecting your ability to secure financing.
Legal & Tax Compliance
The IRS requires that tax professionals keep their business finances separate from their personal finances. This makes it easier to track and report your business income and expenses accurately. If you mix your personal and business finances, it can be difficult to determine which expenses are deductible and which are not. In the event of an audit, if you’re unable to prove your business expenses, you could end up owing more in taxes than you should. Isn’t this the same thing we tell our clients? 🧐
Financial & Legal Liability
A few years ago, we had an issue with our main company bank account. Through no fault of our own, a vendor indicated that both our EFIN and bank data may have been breached. Which meant? We had to get new accounts for BOTH items! Now, the bank account was attached to several things so it was a royal pain in the bootay to fix it. But picture this; what if this happened and it was your personal bank account? Yeah, we think you get the point.
Furthermore, if your business is sued, your personal assets could be at risk if you don’t have separate bank accounts. This is because your business and personal finances are legally considered to be one and the same if you don’t keep them separate.
Additionally, if you’re ever accused of wrongdoing by a client, having separate bank accounts can help to protect you from personal liability. This is because the court can’t seize your personal assets if they’re not mixed up with your business assets.
Professional Image
When establishing and operating a professional bank account and credit card for a corporation, it portrays you as an efficient business owner. Therefore, it allows your clients, partners, and suppliers to view you more favorably and reliable. This action also communicates that your company is well organized and committed to openness. This professional image can foster trust and confidence, potentially leading to stronger business relationships and opportunities for growth.
Summary
As discussed above, maintaining a separate bank account and credit card for your company is a fundamental practice for numerous reasons. The reason for this is that it facilitates clear financial management, ensures legal compliance, enhances professionalism, and contributes to your business’s long-term financial health. Whether you are a solo practitioner, a small firm or a large corporation, separating personal and professional finances is a prudent manner since it will provide you support to achieve financial success and sustainability in this competitive world of business.