Photo by Katie Harp on Unsplash
Attention Entrepreneurs!
One of the most serious problems I have found with my business clients is the inability to keep business and personal finances separate all the time, every time.
For example, my client Mr. Smith owns a small virtual retail store which he operates out of his residence. Mr. Smith, however, has a difficult time separating his operating expenses and personal expenses. What part of the phone bill is personal? What part of the property taxes are business related?
Worst of all, Mr. Smith uses his personal account to pay for business items – and his business account to pay for personal items. I discovered this during Mr. Smith’s divorce – where his business bank account showed a payment for his daughter’s dance lessons!
As an aside: Although this incident happened when I was a practicing attorney, and I am retired, the story still gives me chills.
Not only is this a bookkeeping disaster – making it very hard to track business expenses and measure business performance – but under an IRS audit, or worse, the eyes of a vengeful ex-wife, the question of what is business and what is personal becomes blurred. The fact is, this is the number one reason the IRS will come knocking on a small business’ door. The IRS sees someone spending “business” funds on groceries as someone with a hobby – and a hobby is not a bona fide business.
Again, chills. I’ve been there representing clients during audits. Brrrr.
Even if you have formed an entity and are a serious business, mixing business and personal funds can pierce that entity “veil” – deeming all the money and assets that would have been protected under that entity as owned personally by you. If your business is sued, the court could find no “business” actually exists.
Additionally, it does not look very professional to meet with a vendor and take out a personal check.
As Catholic entrepreneurs – whether a fine artist, author, or contractor – the principles of stewardship, justice, and truthfulness strongly apply. Never mind the 8th Commandment. And the Catechism 2240, explicitly demands paying just taxes.
So, we have the theological, the ethical, and the practical foundations to keep business and personal accounts separate.
For your protection:
Open a business account wherein you deposit all business income.
Pay all business expenses from that account.
If you use a charge card, open a business charge. Do not use that card for any personal transactions.
If you happen to use your personal credit card for a business purpose – like a lunch with a client – present the receipt to the business for reimbursement from that business account.
Ask your accountant to assist you in preparing and keeping your books. Most accountants will recommend small-business bookkeeping software, like QuickBooks.
Keep it honest. Keep it clear.