Why You Should Keep Business and Personal Separate

Often, we hear about mixing pleasure with business. While putting a toe over the line between business and personal may seem like fun sometimes, the reality is that it's actually a very good idea to to keep your business items separate from your personal items.

First Things First: Set Up a Separate Business

It's true that running your business as a sole proprietorship can be really easy in terms of paperwork. However, this business organization doesn't adequately separate your business activities from your personal activities. While this might not seem like such a big deal, the reality is that it can be an issue if your business is sued. If you are set up as a sole proprietorship, your personal assets are fair game when someone decides to sue you.

When you have a S Corporation or a LLC, you end up with a layer of protection. Your business assets are separate from your personal assets, and your personal liability is limited in the event that your business is sued. One of the biggest reasons to make sure that your business is seen as a separate entity from you as a person is due to the protection that comes when you make a legal distinction. Just look at Robert Kiyosaki of Rich Dad, Poor Dad fame. One of his businesses might have declared bankruptcy, but the rest of his personal and business empire is safe.

Make the legal distinction, and you will be able to protect some of your assets from business blunders that you might make.

Keep Your Taxes Straight

Separating your business and personal expenses can also help you keep your taxes on the right track. Being able to separate business from personal is important — especially if you end up facing an audit. You should have a business checking account (and if possible business credit cards). A separate business account can really help you keep track of your business income, as well as ensure that you are spending appropriately. Make sure that you only use money from your business accounts to take care of business-related activities. Be scrupulous in keeping your business transactions separate from your personal transactions so that your accountant and the IRS can see the difference.

It may seem strange at first, but getting the cash flow down is important. I have a separate business account where I deposit my earnings. Then it is transferred to my personal account. I am often asked why I go through this step since all but a relatively small amount of money ends up in my personal account. Why not just send it directly to the personal account to begin with? The answer is in the “paper” trail. It's about making it clear to any IRS auditor that you do separate business from personal, and so that it's easier to identify the business transactions. It helps me with my tax preparation, as well as provides a layer of protection.

After a while, keeping your business transactions separate from your personal transactions becomes second nature. As long as you keep to the dividing line between your business life and your personal life, you will have a better chance of staying out of trouble with lawsuits, and with the IRS.