If you’re a small business owner, it might seem easier to combine your business expenses with your personal ones. However, this can lead to significant financial issues in the long term, especially during tax season and if you face liability concerns. According to the Forbes Finance Council, mixed personal and business banking have a limited audit trail, which is a big red flag. Weak audit trails can lead your business in the wrong direction and create risks for your business. In some cases, you may also ruin your personal credit when you take out loans on behalf of your company.

There are many drawbacks of mixing business and personal finances that can lead to costly errors. So, it is in your best interest to separate business and personal finances. Consider implementing the following strategies to separate the two accounts effectively.

Register Your Business

The first step to separating your business and personal expenses is registering your business and choosing the right type of structure. Some business structures include sole proprietorships, limited liability companies, and corporations. Each business structure offers its own legal and financial protection level, allowing you to keep your personal finances safe.

Your choice of the business structure depends on your business size, affordability, and ability to deal with complexity. A sole proprietorship is a standard structure, most common among small businesses. However, in this structure, you do not have government protection and are solely responsible for any liabilities the business encounters. Limited liability companies and corporations have their own rules, but you are protected in most cases, meaning you have limited liability, which protects your assets in the event of debt, loss, or legal claims.

Open a Business Bank Account

Opening a separate bank account for your business prevents expenses from getting mixed up. A business account allows you to track expenses and collect and make payments. It will also be easier for you to buy materials and equipment for your company.

When reviewing different banking platforms to choose one for your company, consider additional services you need now or may need in the future, such as cash flow management tools, multiple signers, and merchant services. The fees for business accounts may differ from personal, so it’s also important to compare them to make an informed decision.

Differentiate Between Business & Personal Loans

You may need to borrow money for business and personal expenses, but you must keep these two loans separate. When you seek funds for business, lenders may ask you to provide collateral for a loan, typically in the form of accounts receivable, inventory or an entrepreneur’s assets. Keeping your business loans separate under its independent entity will ensure that you don’t have to deal with consequences if you default on a loan.

If you need financial help to cover household or emergency expenses, don’t take money from your company accounts, as this can lead to problems at the end of the fiscal year. Consider taking an installment loan separate from your business. Look for a reputable lender offering installment loans across the country and customize your loan based on your needs. A key benefit of an installment loan is that you don’t have to offer collateral to secure it. However, it is your responsibility to pay your loan on time to avoid unexpected fees and penalties.

Separating personal and business finances may seem overwhelming, but it’s a crucial step that can help you stay on track. This step allows you to establish fair financial practices and protect your personal finances and assets.