For many professionals, the notion of combining business and personal finances isn’t a concern because it’s not a serious option. The issue primarily arises for sole proprietors and contractors who are, themselves, their own business. If you take one-off jobs to provide services like writing, painting, web development, handyman work or landscaping – or you’re just a 1099 worker who contracts with a single client full-time – it may not seem like there’s a real need to separate your personal finances from your business finances.
In these types of scenarios, there are typically two major reasons to separate your business and personal finances: liability and tax implications. If you are ever sued for failure to deliver on a contract or causing injuries or property damage, it’s important that your personal assets aren’t at risk of being seized and liquidated.
Going after a person’s personal assets, or stripping a business owner of their limited liability, is what’s known as 'piercing the corporate veil'. It’s the process of dissolving the protective barriers typically provided by formal business entities. By keeping your finances separate, you fortify the legal shield around your personal assets, ensuring they remain protected in liability scenarios and making it harder for the veil to be pierced.
From a tax perspective, there may be potential write-off opportunities that can make separating your business finances from your personal finances beneficial.
If your revenue and expenses are on the low side for your industry and you don’t itemize deductions when preparing your taxes, you might be wondering whether it’s worth all the extra effort to establish even basic separations between you and your business.
Even after formally establishing a sole proprietorship, you and your business are still technically viewed as the same legal entity according to state and federal law. So, what is the point of separating financial accounts?
Even though Arizona law doesn’t demand a separation of finances for sole proprietors, it’s still a wise practice. By having distinct accounts, you can easily track your business expenses and income, making it straightforward to report your finances accurately to the IRS. It also streamlines the process of proving business expenses in the event of an audit, as your business overhead can be clearly delineated as distinct from your personal finances.
Establishing and tracking business expenses separately does require effort on your part, which is why many small business owners, including contractors and sole proprietors, work with accounting firms like H&H Accounting Services for business bookkeeping and accounting.
Distinct accounts for personal and business use provide a more straightforward, clearer picture of your business's financial health. This separation makes it easier to track cash flow, manage budgets and plan for future investments or expenses.
Additionally, having separate accounts helps in identifying business trends and financial patterns, enabling more strategic decision-making. It also simplifies bookkeeping processes, making it more efficient and less prone to errors.
Your method of handling finances directly impacts your business’s creditworthiness. Lenders and investors often scrutinize a business's financial records before making decisions. You will appear more organized and responsible with separate accounts, which can positively influence the impression banks or investors have of you and your operations.
This separation ensures that your personal financial challenges do not negatively impact your business credit rating. Building a strong business credit history opens doors to better loan terms, higher credit limits and potentially lower interest rates, which are essential for business growth and stability.
Keeping personal and business finances separate not only helps in the smooth operation of your business but also enhances your professional image. While many of the people who hire you and work with you might accept or tolerate a lack of separation between business you and personal you, the fact is partners, clients and suppliers are more likely to respect and trust you as a businessperson if you clearly demonstrate integrity and financial diligence.
In other words, professionalism often enhances business relationships. Increased customer confidence can help with things like client retention and increase the likelihood of future referrals from those partners.
The team at H&H Accounting Services provides all types of personal and business accounting services for clients throughout the Phoenix metro area. We’re committed to offering flexible solutions for business and individual clients of all different sizes.
If you want to know how to shield your personal assets from the risks posed by business liability, or you’re just looking for ways to leverage accounting and bookkeeping to operate a more successful business, give us a call at (480) 561-5805. We would be happy to explain your options and how we can help during a free one-hour consultation.
