Many people in businesses begin by using their personal savings to support their start-up companies. As a result, it's not unusual for people to continue to use their personal funds and credit cards for company purposes in the future. However, in practice, most business owners who apply for financial loans fail because of the exact reason: poor handling of personal and corporate finances!
Separate company and personal bank accounts, on the other hand, are always a smart idea in practice. While it only requires a minor modification, opening a business account has numerous advantages, including:
- Tax savings
- Business credit score
- Loan rates
- Insurance terms, etc.
Good news! Several secured credit cards in Canada provide beneficial credit services to manage personal and business finances. However, it is easier said than done! So, how can you separate your consumer and corporate finances? Most importantly, why should we be doing that in the first place? Let’s find answers!
Why Is It Crucial To Separate Business & Personal Credit?
Separating your business and personal credit is a good idea for various reasons, the most important of which is liability. If your company's credit score is ever put in jeopardy, your personal credit score is also put on the line.
- You may be able to acquire 100 to 1000 times more credit than you could as an individual if you take steps to establish a credit profile for your business that is independent of your personal credit history.
- A business owner spends at least ten times the amount of credit that a consumer does. It's nearly impossible to run a firm on personal credit alone, let alone expand it.
Furthermore, while establishing company credit is simple, few business owners know its importance. Separation can preserve your personal credit in the event of a financial mistake at work or vice versa. By separating the two, you can help your company expand and gain the confidence it needs from banks, money lenders, vendors, and potential associates.
How Is Business Credit Different From Personal Credit?
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Usually, business and personal credit aren’t dependent on each other as they work differently and are measured as per different factors. However, your creditworthiness, ability to handle debt, and repayments depend on your credit score. On the other hand, a business credit score shows how well your business has expanded while fulfilling its financial needs.
Moreover, your corporate credit score also gives an idea if your business was ever at risk, which can alarm the lenders. So, it’s evident to maintain your corporate score while keeping the report free of bankruptcy.
Personal Vs. Business Credit Score
As an experienced owner, you need to understand the differences between the two, and only then can you effortlessly separate personal and business credit scores.
| Personal Credit | Business Credit |
| It is what you build by paying your bills on time every time | It is what you build by showing how well your business can handle money and debt |
| It can help you get good mortgage rates, credit card deals, and insurance | It can help you get the trust of possible lenders, corporate partners, and investors (for business loans and investments) |
So, why must you have a business credit score?
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The sole reason is to protect your personal finances. However, looking at the big picture, keeping track of your corporate credit history can help you land good gigs for your small business.
Let’s discuss why you should keep your business and personal credit separate in detail:
- Efficiently Sorted Bookkeeping
As per the definition of Wikipedia, bookkeeping in a business means tracking all corporate transactions from start to end. It is done to simply organize the financial details in one place to keep a record of everything happening in the business. Therefore, sorting out your financial records to generate accurate financial reports is crucial.
- Having a separate business account can help you in organized bookkeeping.
- However, using the same card for personal and corporate uses will only make your financial history complicated.
In fact, if you seek a business loan, the lenders will be confused by your complicated credit history. Furthermore, it will be difficult for you to distinguish between transactions that were for commercial objectives and those that were not.
- Efficient Tax Handling
Separating your business and personal accounts can help you save time and effort during tax season but can also assist you in filing accurate tax returns. When corporate and consumer spending is combined, reading through every line on your financial documents can take hours, if not days, and increases the risk of including or excluding the wrong items.
- If you use separate consumer and corporate credit, you can efficiently handle your tax filing by just looking into your business transactions.
- Moreover, separate accounts can help you understand all the tax deductions and benefits you can get!
Keeping the accounts separate can help you file more accurate tax returns. Moreover, it can also help you find more tax deductions, which can be complicated if you have merged bank accounts.
- Organized Cash Flow
According to Paul Esajian, having a separate business account is vital to expanding your business and acquiring corporate funds. It's more challenging to disclose your business income to banking institutions when your individual and commercial income is mixed, making it much harder to develop good business credit.
While account balance does not provide a true overview of your cash flow, keeping your business and personal funds separate makes things simpler to analyze and respond to your present financial situation.
- Legal Protection
Having legal protection against any mishap is probably the top reason you should separate consumer and commercial credit. Now, legal protection is different for individual and business owners.
- Lawsuits
You can avoid getting into any bad situations if you establish a separate financial account for personal and business use. For example, if a customer sues your firm for poor service, you won't lose any of your personal assets if your personal money is kept separate.
- Tax Filing
When it comes time to prepare your income taxes, you will have a nightmare going through the process unless you manage your company and individual funds separately. This could increase the cost of accounting fees because CPAs will charge extra for recordkeeping.
- Finance Borrowing
If you want to apply for a corporate loan, you must prove to your lenders and bank that your business can generate leads. However, that will be challenging to do if your accounts are not separate.
Enough with all the reasons why you should keep your accounts separate. By now, you must know the importance of having individual personal and business accounts.
But, the question arises, how can you manage to do that? How do you separate the accounts effectively and efficiently? Let’s find out below!
Ways To Keep Business & Personal Finances Separate
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Most people are familiar with personal credit. Still, few know how corporate credit works or even that, for a matter that it actually exists. Too many knowledgeable, hardworking business owners can’t obtain the financing they require due to a financial knowledge gap.
- You know that keeping accounts separate can protect your personal finances from any corporate trouble.
- You know it can help you build a beneficial line of credit.
- Yes, you are aware you need to have a separate credit to expand your business.
But, it is not as easy as it may sound. So, let’s read some effortless-to-follow tips to help you out:
- Get A EIN!
Obtaining an employment identification number is the first step in separating company and personal resources. An EIN is a nine-digit number provided to your business by the Internal Revenue Service (or CRA )that you use to:
- File your business's income tax or payroll tax return
- Identify your business entity type
- Create a business bank account
- Apply for a business credit card
- And, so much more!
Consider it the commercial equivalent of your SSN. You won't have to utilize your social security number for commercial purposes after you have an EIN, which helps draw a line between your company and consumer finances.
- Apply For A Business Credit
You can’t separate your personal and commercial finances if you don’t have individual accounts for both purposes! Getting a company credit card helps you to cease accessing personal accounts for company activities, and it's a simple method to keep personal and business costs separate.
- Obtaining a corporate credit card can help you make immediate financial decisions for your business without worrying about the consequences on your personal finances!
- Using a business credit card will allow you to build a good corporate credit history which can help you attract investments and funding.
Your business credit card is the key to keeping your personal finances separate from your commercial activities.
- Invest Time In Bookkeeping!
What better way to show you're serious about keeping your personal and work costs separate than to arrange your receipts practically? Of course, nothing! However, having separate bank accounts can go to waste if you don’t have a good habit of recordkeeping. Yes, if you store your personal and business receipts in one folder, all your effort will be in vain.
- Firstly, keep your work and home laptop separate, so if you habitually record things using accounting and invoicing software, it won’t confuse things.
- However, if you can’t afford separate work machines, you can create folders and different files with names specifying their purpose.
The sole reason is to make the auditing process tension free if your business was ever audited or asked for accurate taxes.
- Keep Everyone On The Same Page!
Educating every staff and employee about financial literacy is important as you can’t manage every trivial detail at all times. Moreover, you have to let everyone know never to mingle your personal and corporate credit. This is important for the businesses that used to use their personal finances for business activities and recently separated the accounts.
- One tip to do so is to put one person in charge of tracking the expenses instead of allowing everyone to use your cards for business transactions.
- You can also choose one or two employees to deal with specific payments so even if one person misses something, the other employee can cover it by default.
The goal is to talk it out with your employees and let them know what you’re looking for in your business growth.
- Establish A Separate Business Entity
Now that you have your EIN, you can successfully establish your corporate identity either as an LLC or a corporation. By forming a limited liability company (LLC) or a corporation, you formally structure your company as a separate legal entity. Incorporation also gives your business legal protection and allows you to file your business tax forms and statements separately from your personal tax taxes.
- It can protect your personal assets from any business lawsuits or debts.
- It will put your business literally on the map, thus giving a signal to all the lenders and investors that there’s a new fish in the sea!
However, if your business works on a small scale or doesn’t have an EIN, you might want to consult a legal expert to ask for advice on this aspect.
Bottom Line
You must not mix two things: your personal credit and corporate business account. The main reason is to reduce any problems that can harm both your individual assets and business financial activities. In fact, failing to manage both accounts separately can put you in legal trouble. Moreover, it might make your recordkeeping a nightmare which is even worse for your business growth!
So, as a business owner, you must understand the importance of keeping accounts separate and finding ways to do so. However, applying new financial techniques to your new business can sometimes be scary.
Worry not! Getting an EIN, establishing a separate business identity, and opening a business credit account are some of the ways to keep your accounts separate. Want to know more? Read the full guide!
