Money is always such a fickle thing. It’s always fun to spend it, but so hard to have enough. Finance, especially, can be a tough area to really understand and to manage. This is even more true when it comes to personal finances and business finances. Although they are two different things, it’s very easy for the line between the two of them to become muddled and start to blend into one. Especially if you are the business owner. For those who haven’t had to deal with business finances yet, think of it as some kind of loan that you have taken. It’s all too simple for you to start thinking, “Oh, i’ll just take a little bit from here and put it there.” Say you’re a little short on rent, or your kid wants a new toy that you can’t afford. There are a multitude of reasons why you would want to combine the two finances, but that would be a huge mistake.

Now, some of you are probably thinking, “What’s wrong with mixing the two? I can just take it all together as one and budget it together.” Unfortunately, that is some very dangerous thinking. First off, you have to realize that an organization is its own living and breathing being. It can’t simply just be mixed with anything, but let’s start with probably the most realistic reason why it wouldn’t work; filing taxes. Can you even imagine the amount of work it takes to file your taxes if everything is commingled? You would be drowning in numbers and papers trying to figure out what is what. Not to mention, you would probably miss out on all the deductions you would’ve been able to claim for all business-related expenses just because you wouldn’t know which is which. If that didn’t scare you, then the next reason would be the debt. It’s possible for your creditor to take actions against you for debts if you haven’t separated your personal from your business. Bankers want to see everything separated too. , Most bankers won’t be able to help you get business financing if things are commingled.

Perhaps the most important reason though, is the legal reason. When things are commingled, it makes piercing the corporate veil too likely when a potential suit happens. That’s the reason many business owners create their companies; to protect themselves personally should a lawsuit arise.

So, now that you see why it’s such a bad idea to combine the two finances, let me tell you how you should separate the two. Step one is to set up a separate legal entity for your business. Once you do that, you are able to create an EIN (Employer Identification Number). You can do this online at no cost. Step two is to set up bank accounts that are specifically and exclusively used for your business. You must make sure not to use these accounts for anything other than business. Step three would be to hire an accountant or to set up some kind of bookkeeping system. Not every owner is going to to have the desire to manage the books, so might as well hire someone that can take care of that part of the business for you. Lastly, start building up business credit. Set up a business credit card and make sure to pay your bills. The benefits of doing all this? Tax Deductions, Legal protection (Personal and Business), financial diversification, and a professional reputation.