In the early days of a business, especially one that starts out very, very small, it can seem that separating business finances from personal finances is more trouble than it is worth. Just sticking funds generated by the business into your checking account, and then paying for business expenses the same way, seems easy.
Things become much more complicated as the business grows. This being the case, it is best to keep things separate from the beginning, for many reasons.
When you own a business, there are legal steps you can take to ensure that you personally are not held liable for the business. In most cases, with varying exceptions, this means that if your business goes bankrupt, you will not have to pay business debts from your personal account.
If you mix business funds with corporate funds, you have effectively “pierced the corporate veil.” In this case, the courts can rule that if you did not respect the corporate separation yourself, creditors do not have to do so either.
Taxes can be tedious no matter what. If you have to separate business expenses from personal expenses and business funds from personal funds on the back end, it can become almost impossible. Trying to do so can cause mistakes that make even bigger trouble in the case of an audit.
Keeping finances separate from the beginning can make the process of doing business taxes much easier, as well as making the audit process easier if an audit occurs.
Physical vs. Paper Separation
There are a couple of options when it comes to separating finances. The easiest and most effective way is to have two separate accounts, one for business and one for personal funds. The way to do this would be to open a business account at the inception of the business and simply never mingle funds.
Some choose to separate funds on paper only however, feeling it is less complicated if the money is already mingled. This is acceptable, and permissible, but can still cause issues, especially with the auditing process.
While the choice is definitely that of the business owner, there is no denying the evidence that separating business expenses from personal expenses, both on paper and physically, is the best course of action for a number of reasons.
Of course, if they are already together, it will be difficult to separate them. The best course of action in this case is to work with a CPA in an effort to get the work done while ensuring the paper trail is sufficient for tax and legal purposes.