Why keep personal and business expenses separate?

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Follow these steps and eliminate reporting headaches!

There are so many reasons to not mingle business and personal bank accounts and transactions.  Whether you are a sole proprietor or have formed an entity, such as LLC or corporation, one of the first steps in forming the business is to set up a business checking account.  This business checking account should only be used for the business. It should not be used for personal expenses or personal deposits.  This applies to credit cards too.

This is something I run into all too often.  It’s one of the first questions I ask a new client and one of the first requests I have before taking over their books. I beg of you, please don’t mix business and personal expenses.

One reason to avoid this has to do with bookkeeping and bank account reconciliation.  When it’s time to enter your transactions into your accounting system, such as QuickBooks, you have to account for every transaction on your bank statement.  Personal transactions will have to be entered in your accounting system in order for the bank accounts to be balanced.  You will have to set up different accounts in the chart of accounts to track these personal transactions and this can become cumbersome, especially since the typical small business owner does not update their accounting system on a regular basis (which is a whole different issue and maybe another blog post). As well, the only way to produce accurate financial statements is to pull out the personal transactions.  Doing this is cumbersome and confusing, resulting in unnecessary errors.

This leads to the next reason; tax time.  Filing a tax return can be a nightmare if you aren’t sure what transactions account for business and personal. When this happens, you are likely to end up filing without being able to claim all the deductions you are actually owed. Good records are imperative for a business, no matter the size, to be able to move forward and achieve true success. Not to mention, your nightmare will become a reality if you are selected to be audited.

The third reason has to do with the IRS again.  Imagine that.  If you have formed an entity, such as an LLC or corporation, which offers personal liability protection, you can lose this protection. This can happen if the IRS feels that you are not acting in the manner that a true company should act.  They feel that mixing business with pleasure is not good business practice and frown upon it. They will say that your business is a hobby and not a true business. The IRS can ‘pierce the corporate veil’, which means you loose all personal liability protection.  This can result in you becoming  personally liable for any business lawsuits and debts of the business.

Hopefully, if you are currently mixing business with personal you will decide to stop doing this immediately.  Trust me, it will streamline your bookkeeping and reporting, which I find to be invaluable.  If you need help fixing your books and moving forward, feel free to contact me for advice.

Copyright 2014 Christi Rains, Alpha Omega Consulting & Bookkeeping, LLC

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