12 Finance Experts Share Cautionary Advice For Solopreneurs Mixing Personal And Business Banking
For a solopreneur—someone setting up and running a business on their own—it can be tempting to mix business and personal finances. After all, if you’re the only person responsible for the business, it might seem easier to have a single bank account.
This may work in the very earliest days of the business, but this situation rarely works to a solopreneur’s advantage in the long run. There are numerous pitfalls—and missed opportunities—you should be aware of before mixing your business and personal finances. Below, 12 members of Forbes Finance Council offer cautionary advice for solopreneurs who are combining their business and personal banking.
1. You Need Proper Books To Understand Your Business
A key to running a successful business is understanding your gross revenue, expenses and profit. Keeping proper books and an updated P&L is essentially impossible if your personal and business accounts are combined. Separating your personal and business finances will empower you to monitor how your business is performing financially and give you the best opportunity to succeed. – Will Duffy, WD Wealth Strategies
2. Separating Will Make It Easier To Track The Company’s Performance
While mixing business and personal finances might seem easier in the moment, it can create major challenges for budgeting, expense tracking, taxes and accurate financial reporting. By separating these accounts, you’ll simplify the process of tracking business expenses and have a more accurate view of your company’s financial performance, which can make doing business (and tax time!) easier. – Jenn Flynn, Small Business Bank at Capital One
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3. It’s Easy To Set Up Separate Accounts
If you’re a solopreneur mixing business and personal banking, try as hard as you can to quit cold turkey. You’ll save considerable time and money. The time aspect is especially important because, unlike money, you can’t recoup time. Establishing a separate business account is quick enough and simple enough that you shouldn’t be avoiding it another day. – David Haass, Elite Insurance Partners, LLC
4. Personal Funds Spent On The Business Should Be Tagged
If for any reason you have to start with a personal account, get that business account opened ASAP. Tag money spent on the company as a business investment or loan in your personal bank’s online software, and record those funds in your personal accounting as a loan or investment. Then record the amount you used from your personal account in the business’ accounting. This gets you rebalanced, and any personal funds you’ve spent become equity you loaned or invested to start the business. – Kurt Kunselman, AccountingSuite™
5. You Should Log Any Money Transferred Between Accounts
Stop immediately! It is very easy to open a new account and have separate business and personal accounts at the same bank, so do it. If you need to pay for something personally, then transfer money to your personal account, pay the expense from your personal account and log it properly. The same goes for when you send money from your personal account to the business account. Proper logs and separate accounts will save you in the long run. – Joseph Orseno, Tiltify
6. You’re Opening Yourself Up To Tax And Liability Issues
Whenever you mix personal and professional cash, you open yourself up to tax and liability issues. Make sure you have a way to keep separate records of business transactions versus personal transactions in your cash inflow and outflow—especially your expenses. It’s better to keep separate accounts to keep the accounting, and subsequent tax filings, easier, and it saves you time and headaches when the paperwork is due. – Aaron Spool, Eventus Advisory Group, LLC
7. Sound Financial Practices Reduce Your Risk
Businesses—specifically early-stage companies or those with tightly held shareholding—are very much linked and related to their founders. A business, no matter the stage, should be managed professionally, with consideration given to sound financial and governance practices. Implementing this early reduces risk, which in turn increases the attractiveness of the business to financiers or investors. – Jason Hamilton, First River Capital
8. You May Be Missing Out On Some Advantages
Don’t mix business and personal banking or business and personal credit. You are actually missing out, because there are a lot of advantages if you separate them. You don’t want to co-mingle funds, which can mess things up during tax time or when applying for a house. Hire an accountant to put you on your business’ payroll, and budget your spending. Having business credit cards will help as well. – Jose Rodriguez, Got Credit?
9. Separate Accounts Can Keep You From Overspending
I’ve worked with clients who have commingled their business and personal funds. This creates problems for these business owners: They do not have a true financial picture of their business, and it opens them up to other liabilities. You should set up separate accounts as soon as possible and track business and personal expenses separately. It will also keep you out of trouble by helping you avoid overspending. – Brian Hayes, NOW CFO
10. You May Send An Alarming Message To Potential Partners
If you’re passionate about what you’re building, you should treat it as an asset for sale. Imagine what an acquiring entity would say during due diligence if your personal and business finances were mixed. What message would that give to future partners? How does that change your valuation? The devil is in the details; take the time to do it right. – Drew Gurley, Redbird Advisors
11. You Need To Keep Your Future Plans In Mind
For both business and personal tax and accounting purposes, the separation of finances is a good practice. Think ahead five or ten years when setting up the business: Will you be exiting at some point? Yes. Keeping clean records allows you to pull good data when you exit versus having to re-create a clean set of “just the business” records when presenting to a buyer. – Cynthia Hemingway, Fourlane, Inc.
12. Your Primary Bank Can Help You Set Up A DBA
Solopreneurs, gig workers and small-business owners should never mix personal and business finances because it can become very difficult to get clarity on the performance of your business. Getting set up with a doing business as (dba) account can be done easily at your primary bank, and a business banking relationship can afford you more time to focus on growing your business with fewer headaches. – Dan Henry, Green Dot