One of the biggest issues I hear from small businesses is their trouble with separating their personal expenses from business expenses.  IRS does require that there’s a clear line drawn between the two in order to demonstrate a clear carrying on of legitimate business operations as opposed to concocting fake business expenses in a tax evasion scheme, which as you can imagine is quite common. 

The other place this separation of business and personal expenses matter is in court, and having to prove, once again that the business is legitimate.  Mixing business and personal expenses can be construed as the business owner is operating the business as self instead of as a business entity. This means the owner and the ‘business’ are one and the same, meaning liability protection is a moot point, sort of like the back and front of a hand is still the same hand.  This becomes very important with businesses that have limited liability.  There is ALMOST NO LIMITED LIABILITY PROTECTION IF THE BUSINESS IS BEING CARRIED ON AS YOURSELF. As you can imagine, it is beneficial for your court opponent to prove a lack of separation of business and personal expenses. 

Separate accounts is the best and prescribed way of separating business expenses from personal expenses. You must make sure all business expenses are purchased through business accounts only and that only business expenses are purchased through the business expenses.  These accounts include bank, credit cards, PayPal, and vendor accounts. The same goes for personal accounts: use personal accounts to purchase only personal expenses. Then you can be sure that all transactions running through your business accounts are business only. Of course, for small businesses, it is not always practical to have separate accounts for everything.  Really. It’s not.  That’s just the nature of small business. So what is a small business to do? 

First, don’t incorporate or file for an LLC until you are able to establish separate accounts,  and be DISCIPLINED about separating the your business accounts from your personal.  otherwise, your limited liability protection is simply an illusion! An expensive illusion, and who wants that? Finally, if you are already incorporated or an LLC, and separate accounts is not practical,  you must make sure to keep very good track of your RECEIPTS. The receipts then should be entered into an accounting system diligently. Then your record keeping must be consistent and diligent. Then you must also be diligent about tracking your PERSONAL expenses. This protects yourself and your vendors. You've got questions?! Got comments?! You got ’em, you got’em…. Contact us! We want to know your experiences with your bookkeeping, whether just starting out, just switching, been in operations all these years, or just researching...and the rainbows in between!