Why You Should Keep Business and Personal Money Separate

If your business and personal spending flow through the same account, you are making your own life harder. Here is why it matters and how to fix it.

Why it matters

• Cleaner tax records. IRS Publication 583 advises business owners to keep business and personal expenses apart, and says records that support your income and deductions must be kept. Separate accounts make that much easier.
• Fewer mistakes. When personal purchases sit beside business ones, you may deduct something you should not, or miss something you could deduct.
• Legal protection. An LLC protects its owners from the company’s debts. Courts can look past that protection when an owner treats the company’s money as personal money. A lawyer can explain how this works in your state.
• Foreign-owned LLCs. A foreign-owned single-member LLC reports transactions with its owner on Form 5472, and you need clear records of each one. See Form 5472 explained.

How to separate them

1. Open a business bank account. A foreign owner can often open one too.
2. Deposit all business income into that account.
3. Pay business expenses only from business accounts or cards.
4. Pay yourself by transferring money to your personal account. Label each transfer as an owner draw or distribution.
5. If you must put personal money into the business, label it as a contribution or a loan, and keep a note of which.

Already mixed them up?

Do not worry. Go through the statements, mark each transaction as business or personal, and record the personal ones as owner draws. Keep the receipts for the business ones. Then start fresh with separate accounts.

What not to do

Do not pay yourself by writing checks to cash or by paying personal bills from the business account without recording them. These habits make the records hard to explain later.

If your books are tangled, book a call with FlowTex and we can help sort them out.

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Sources

• IRS: Publication 583, Starting a Business and Keeping Records
• IRS: Instructions for Form 5472

This article is general information, not tax or legal advice. Liability protection depends on your state’s law and your facts.