Are you using a single bank account for your personal and business finances? You must consider separating the two since this is a bad practice that can have adverse financial consequences. Every company should have a separate business bank account.
GAAP mentions that a business should start with a separate entity concept. It says that the business is different from its owner, and the owner should keep their finances separate from the business.
The separate entity concept helps you assess your business’s financial situation and see how rapidly it grows. It also makes the accounting process more manageable and enables you to identify the areas where some work might be needed.
Why Separate Personal and Business Financing?
One of the primary reasons your business should stand as a separate entity from your finances is taxation. Tax authorities charge taxes separately on business accounts, and tax rates also differ on corporate accounts. Therefore, businesses can never keep their earnings in their accounts because authorities don’t allow that.
Audit and compliance problems would also arise if you started co-mingling your personal and business finances or keeping both funds in your accounts. If you start saving your personal and business earnings in one account, you won’t be able to properly assess your business’s financial performance and growth over a certain period.
Keeping business and personal finances separate can benefit an entrepreneur in various ways.
Here are some reasons for keeping the personal and professional accounts separate.
A Reduction in the Amount of Payable Tax
Certain expenses incurred in a business reduce the tax an entrepreneur needs to pay on their business account. Suppose an entrepreneur uses their business account to pay for the costs incurred. In that case, some expenses might be deducted from the tax they must pay.
Keeping the finances separate helps entrepreneurs present a better picture of their business finances before tax regulatory authorities. This practice proves its worth when you file for your business taxes.
Convenience in Audit
Suppose you are an entrepreneur and started your business with a separate business account. In that case, it will significantly help when the government audits your business. Different business and personal financial accounts can make compliance easier for an entrepreneur with federal regulatory bodies’ regulations. When a regulatory authority conducts a business audit, they see certain documents, for instance, financial reports, supporting documents, tax returns, etc.
When an authority asks for the paperwork under such circumstances, it will be much easier for business owners to produce their expense lists if their personal and business accounts are separate. Another benefit of keeping both accounts separate is that, as a business owner, you can ensure that you are not paying your expenses from your business account or vice versa.
Easier for Your Accountant
There is a rule in corporate finance that no business owner should use their business account to pay for their expenses. A business account must only be used to pay for costs incurred. This way, it is more convenient for an accountant to record the receipts and memos. It becomes easier for them to produce the paperwork when any government regulatory body conducts a tax audit.
Besides that, it is also an accountant’s job to compare the financial position over two years to prepare a report and submit it to the board of directors. Keeping both accounts separate can help them easily fetch the files and go on with their comparison.
Financial Stability
Every ambitious person starting their venture knows it can become a failure and that putting a business in place is a calculated risk. There will come a time when your business goes through some turbulence. It is best to keep both accounts separate and some of your business income in your personal account to benefit you during tough times.
There are several other reasons to keep your business finances separate from your accounts. They are all for the benefit of a business and keep it aligned with federal laws and regulations.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.