Separating Personal And Business Expenses As A Sole Proprietor
When people start new businesses and have no employees, they often choose a sole proprietorship as their business type. Being a sole proprietor has its benefits. This business entity is easy to set up. Plus, it’s not very expensive to get up and running quickly. You also have complete control over all your business decisions, which alleviates stress for many entrepreneurs.
However, it can be difficult in terms of money. It’s often challenging to separate business and personal expenses, since they tend to overlap when you’re running your own business. Keeping detailed notes about expenses is critical, though. In fact, 90% of new businesses fail, and one of the reasons why is money. Here are some reasons why you need to track your expenses.
You Won’t Be Able to Gauge Your Profit
If you’re using money from various accounts to fund your business, you’ll have a harder time understanding exactly how much money you’re spending. As a result, this can make it hard to determine your profit. You might think you’re making more money than you really are.
You Risk Account Closure
You should have at least two bank accounts: a personal one and a business one. When you use your personal account for everything, your bank may catch on and close it. They’ll request that you use a business account for business purposes. This makes sense when it comes to taxes.
You Need Accurate Bookkeeping
Accurate bookkeeping helps you understand who much money you are making and how much you are spending. This also helps determine taxes, so using one account for personal and business expenses can lead to miscalculations. Plus, if you ever get audited by the IRS, having everything in order makes things much easier. Having to manually go through and figure out which expenses are business-related and which ones are personal can be a nightmare.
Your Personal Assets Are on the Hook
Keeping things separate is good practice for legal reasons. If you are ever sued, your personal assets will be on the line if your assets are not kept separate. This means that if you ever have business debt, many of your personal assets could be at risk.
If the other reasons aren’t enough to convince you to get separate bank accounts, consider this one: it’s simply unprofessional. As your business grows, you want to be regarded as a reputable company. You don’t want to have a bad reputation in terms of finances. People and other businesses won’t want to work with you. It’ll be hard to get investors, since they’ll want access to all your business information. This is hard if you’re using solely a personal account.
Learn More About Sole Proprietorships
Many sole proprietorships fail because of the lack of detail when it comes to finances. It’s important to keep personal and business expenses separate, especially when it comes to tax time.
Orlando sole proprietorship lawyer B.F. Godfrey from Godfrey Legal can help you make the right decisions so you can poise your small business for success. Schedule a consultation by calling (407) 890-0023 or filling out the online form.