Treating Business Funds as a Separate Entity from Personal Assets
Treating business funds as a separate entity from personal assets is considered by most business experts as managing finances in the right way.
By doing this kind of financial management, people can reduce the risk of bankruptcy, draft a clean business account, allow their companies to be well-funded, and avoid partnership disputes which may result to lawsuits.
Successful businessmen have one thing in common: they know how to manage their finances while making sure that their expenses are smaller than their profits. To do this, personal expenses should be separated from business assets.
While treating business asset as a separate entity from personal asset may not be easy especially when most companies started from the own pocket of entrepreneurs, doing this is very important to make sure that personal expenses will not hurt the finances of a business.
If a business is owned by more than one person, separating business and personal expenses is very much important to avoid dispute between partners or co-owners which may result to expensive lawsuits.
Meanwhile, most partnership agreement has a provision that tells partners to treat their business as a separate entity from their personal properties. This means that they receive their monthly shares of profit just like any ordinary employee. With this kind of arrangement, it is easier to avoid confusion, disagreements, and disputes which may arise in mishandling of finances.
In corporation, which is a type of business structure that has several partners, there is a strict way of handling finances to make sure that a company will not run out of funds.
According to business experts, partners in corporation has a “limited liability” which means that if their business goes bankrupt, their personal assets are protected and will not be liquidated to pay for the debts they have incurred. Only the business assets will be liquidated to be paid to banks or vendors.
However, the principle of “limited liability” will be void if a partner treats the business as an extension of his asset. For example, a businessman spent a huge portion of the profits to buy luxury cars. Eventually, his business went bankrupt and was forced by the court to liquidate his personal assets including cars, houses, and other properties to pay for all the debts his business incurred.
Separating business and personal expenses is not only applicable to corporation and partnership. According to business experts, this kind of financial management is also important in sole proprietorship and even informal and small-scale businesses.
The reason for this is simple: treating personal and business assets separately will allow people to draft a clean business account where expenses, profits, and liabilities of a company can be balanced.