Business Expenses

The Importance of Separating Personal and Business Expenses for Sole Proprietorships

A smoothly running business needs accurate record keeping. Separating your business expenses from your personal ones helps. Click to find out why.

Tim Wu

Head of Growth

Were you aware that separating personal and business expenses is crucial if you want your business to succeed?

A sole proprietorship is a type of business that's operated by a single person. Many people start sole proprietorships when they want extra income but can't create a larger business. Doing this can be done by anyone, but it may be difficult in the beginning because you won't have other people to rely on.

When starting a business, many people make the mistake of using their personal checking accounts. However, this makes it difficult to manage business expenses. When you look at the account's history, you'll have to figure out which transactions are business expenses.

Read on to learn more about why sole proprietors should separate personal and business expenses!

Make Filing Taxes Easier

One of the main reasons to separate personal and business expenses is to make filing taxes easier. This is something that many sole proprietors overlook, but it's necessary if you want to file taxes as quickly as possible.

When filing taxes, you're responsible for providing several documents that show how much money you've made. Aside from that, you must show what you've spent your money on if you're trying to get tax deductions.

Without a separate checking account for business, it'll be difficult to determine which transactions are business-related. This can be a problem when doing taxes because you'll be forced to examine each transaction.

If you get audited by the IRS, they may request bank statements for your business. This can be another problem if the expenses aren't separated because they'll think everything is either personal or for the business.

Avoid Overspending

As a sole proprietor, you technically own a business. Because of this, it's crucial to avoid overspending, especially if you're small.

When starting any business, opening a business checking account should be done immediately. Doing this will make it easier to avoid overspending because you can see exactly how much your business is earning.

If you have another job outside of the sole proprietorship, you can prevent yourself from pulling money out of the business and vice-versa. Keep the income from your day job separate from the business's income.

Whenever you have personal expenses, you should never take money from your business account to pay for them. If this happens, you must evaluate your expenses and determine which can be cut so that you can afford everything else.

Monitor Business Performance

As your business grows, it'll become much harder to monitor its performance without proper bookkeeping. Fortunately, a separate checking account lets you monitor the business's performance without having to spend too much time looking at finances.

When separating business expenses, you can make bank statements that show how much you've spent. These statements can be customized so that you see certain transactions. For example, you can see all purchases from a specific supplier.

You can also make statements for different periods. This allows sole proprietors to create a paper trail over one or several months that can be used to monitor performance.

It's best to evaluate your business each quarter so that you can make changes to improve the business. This gives you plenty of time to put new plans into action and see how well they do.

If you find that you're spending too much money, look at your bank statements and see where the money is going. Without a separate checking account, you'd have to hire a bookkeeper to go through everything for you.

Get Business Credit Cards

Many sole proprietors seek business credit cards because they often don't have as much funding as larger businesses do. However, getting one is difficult unless you have a clear paper trail for your business.

When making business transactions through a personal account, lenders won't know exactly how much is being spent on the business. This won't help you get a business credit card because they want to see your net income.

Getting any type of business loan is easier with a separate checking account. Similar to getting audited by the IRS, you can show the business's income and expenses without involving your personal expenses.

Establishing a business line of credit will also help you get better loans in the future. Shortly after opening a separate checking account, you can seek business credit cards and start using them.

How to Open a Business Checking Account

Opening a business checking account involves the same steps that you'd take to open a personal account. All you must do is visit a bank and ask them about their options for businesses.

When meeting a banker, it's best to describe that you're a sole proprietor. This will help them decide which account would be best for you because an account can have different terms depending on how large your business is.

For example, some accounts require a certain amount to be deposited regularly whereas others don't have minimum requirements. You can compare different banks until you find someone that offers favorable terms.

Manage Business Expenses the Right Way

After reading this article, you no longer need to ask yourself whether opening a separate checking account is necessary for your business. As soon as you start a sole proprietorship, we encourage you to open an account for it.

Keep in mind that when you're paying for things, you should never take money from the business account. Mixing business expenses with personal expenses will result in overspending that'll be hard to recover from.

Our team is hard at work building Hatch Business Checking, a modern business bank account with no minimum balance requirements, no NSF fees, and exclusive access to cashback rewards and discounts on business software! Sign up for our waitlist now and get your first month for free when we launch!

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