If you are launching a new venture, you may wonder whether it’s necessary to open a dedicated bank account for your business. Even if your company is established and already has separate checking and credit-card accounts, you may be tempted to pay business expenses from personal accounts on occasion — or vice versa — particularly during tough times.
The more your business and personal outlays become entwined, the harder it is to manage your company’s cash flow, payroll, and taxes. It might also be difficult to keep tabs on the company’s financial performance.
Here are three key reasons to draw a clear line between your business and personal finances — and do your best never to cross it.
1. To Increase Purchasing and Borrowing Power
To open a business bank account, you may be required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service. Building a relationship with a bank that serves small businesses might provide access to other important financial services and resources, such as a merchant account, a line of credit, and a business credit card.
Using a business credit card responsibly is one way to establish the positive credit history that could help you qualify for larger business loans with better rates and terms, and without personal guarantees, in the future.
2. To Make Life Easier at Tax Time
Maintaining separate bank and credit accounts means you won’t have to spend time sorting business purchases from personal ones.
As a small-business owner or independent contractor, you may be eligible for a long list of tax deductions that don’t apply to regular wage earners. Careful tracking of your business expenses can help you and your tax professional take full advantage of deductions and reduce your tax burden.
3. To Protect Personal Assets
If your business struggles, it could pose a threat to your personal assets and credit. Paying business expenses directly from personal accounts might help substantiate a creditor’s claim that your business was being run improperly.
Keeping your financial accounts separate may be especially critical if your business is incorporated as a C corp, an S corp, or a limited liability company (LLC). The corporate veil, which refers to the legal distinction between a corporation and its owners, is designed to protect the owners from liability related to the company’s actions. However, commingling personal and business funds could pierce the corporate veil and leave your personal assets vulnerable to business debts, losses, and lawsuits.