No matter how young or new your small business is, it's important to understand and follow the rules of separation of business and personal expenses. Why? How can failure to separate hurt you and your enterprise? And where can you get help improving in this area? Here's what every entrepreneur and business owner needs to know to avoid problems.

Why Separate Business and Personal?

Small business owners routinely find their personal and business life overlapping. So, trying to keep the financial elements of both roles separate takes additional work, self-discipline, and diligence. Why bother? There are many reasons. 

First, mingling your personal life and your role as a business owner, director, or key employee pierces the veil of corporate protection. When you form a corporation, you create a barrier between you and the company. This barrier protects your personal assets from seizure to pay business liabilities — and vice versa. However, when you financial intermingle things, you no longer have liability protection. 

Second, personal expenses paid by a business may be taxable income. Reimbursement of personal expenses that are legitimately part of furthering your business are deductible by the company and nontaxable to the individual. However, when you stray into paying outright for things like personal meals, travel or vacations, tuition, a personal vehicle, you run the risk of IRS intervention, fines, penalties, and additional taxes. 

Finally, separation of personal and business activities is the standard for corporate accounting. Everyone — from your accountant to your lenders and stockholders — will expect you to hold to this principle. Not doing so opens up your company to questions of ethical behavior, profitability, and even fraud. So it's not a habit a new business owner would ever want to develop.

How Can You Improve?

If you haven't paid attention to the mingling of personal and business items, now is the time to start doing better. Learn about the GAAP (Generally Accepted Accounting Principles) regarding payment for personal expenses. Consult IRS rules about things like deductible travel and meals so you know what to expect. And when you do deal with personal expenses, make sure you properly declare them through payroll.

Where Can You Get Help?

Like many components of business accounting, it can be complicated to maintain an ethical distance between your personal life and business. Get help by working with a reputable accountant in your state. With their guidance and expertise, you'll soon find that it's not as difficult as you thought. And it will set up your company for a lifetime of success.

For more information on accounting, contact a professional near you.

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