Before answering the topic at hand, let’s understand what is personal and business funds.
Personal funds are those funds which are used by an individual at a household level for example budgeting, insurance, savings, retirement planning etc.
Business funds are those funds which are required to fund a startup or a company. They are mostly given to entrepreneurs by businessmen in return for equity or share in the company.
The reasons on why not to mix personal and business funds are as follows:
Bookkeeping Becomes Difficult
Bookkeeping in a nutshell is the recording of the financial transactions conducted by an organization on a day to day basis. They must be correct, up-to-date and easily understandable. When you do not have separate funds for personal and business, they are recorded together in your bookkeeping system. Hence, you will have a difficult time discerning the use of those funds. Thus, one must keep both of them separate so as to avoid any sort of difficulties later on.
Tax Return Filing Becomes Cumbersome
Filing tax returns can prove to be a monstrous task if you do not separate business and personal funds. Separation of personal transactions while filing tax returns can be a really cumbersome job because the correct figures are required to calculate it. So a disjunction between the two can be a boon. There are several aspects that show your business is tax ready, and having separate personal and business accounts is one sign.
Limited Audit Trail
CRA is more likely to audit your business if you do not keep your personal and business funds separately because mixing them both increases the risk of overstating your business expenses. It’s better to buy office supplies such as computers, software and pay business rents from business funds and your personal laptop and pay for a vacation holiday from your personal funds. This makes it easier to prove which purchase is for you and which is for the company.
Do not Treat Your Business Funds as Your Personal Piggy Bank
As soon as the business starts to make profits, the owners wish to reap the profits and their lifestyle costs increase. Since they have mixed their personal and business funds, this leads to a dangerous scenario with their business funds depleting. If their business is affected by a business crisis, such as the 2008 economic recession, the lack of funds will result in the company closing down.
All the above reasons suggest why not to mix personal and business funds as it not only saves your time while filing tax returns but also maintains a professional conduct which is the crux of any business. If you require assistance in separating your personal and business accounts, it would be advisable to reach out to a professional accounting firm.