If you’re a business owner, the lines between business and personal expenses can get blurred. This mistake is often the prime target for taxation scrutiny in audits.

As a rule, your business should be considered a completely separate entity from day one, no matter what type of business you’re running.

Here’s how to keep your business money separate from your personal money.

1. Don’t pierce the corporate veil

When a clear distinction cannot be found between your personal and business expenses, you might be held responsible for company debts. This is called piercing the corporate veil.

If your business faces a crisis and the courts cannot determine the intersection between personal and professional finances, your assets might be seized to meet the demands of the creditors.

So a little effort can save you from a blatant disaster in the future but it’s best to consult a legal advisor for more clarification.

2. Keep it professional

Neither customers nor clients feel secure and confident when they’re dealing with a business that seems more like a hobby. Your business must look professional.

For instance, when a client writes you a personal check instead of writing one to your business, it’s absolutely natural for the client to feel uncomfortable although it might work for you.

3. Avoid self-destructing

You should view your business as an individual, separate and living entity so you don’t treat it as your personal cash register. This mindset can ruin your business, draining it to a point of insolvency.

Even the most profitable industry can plummet when the owner takes out too much money with no concern for the solvency of the company. There are many individuals who lavishly overspend business funds on luxury items, just because they have a lot of available money.

4. Be ready for tax season

All your business expenses should stay separate from personal purchases when you have a business account. It’s recommended to set some additional money aside before the tax season arrives.

You’ll never have to worry about draining your personal account for covering taxes when there is sufficient money in your business account.

5. Track your business expenditure

Tracking your business and personal expenses separately is an important component of financial segregation. If you’re raising the startup capital for your business and even if you’re using your own money, prepare a separate budget to ensure you can cover your individual expenses.

This is true for a one-man shop as well. If you have a tight personal budget, look out for external funding. Also, use business credit accounts.

For example, if you need to buy a cash register, use a business cheque or a company credit line. Similarly, when you pay your own bills using business funds, write a check to yourself instead of doing it right from the company fund.

If you can focus on drawing on the right account for the right transaction, all you have to do is review the bank statements during tax time. You can even do the taxes and financial reporting directly from the bank statements if you only use your business debit or credit cards.

6. Get a business credit card

It’s difficult to meet lending requirements when you have a small business or a startup. However, try to get a business credit card.

Just like having separate checking accounts, a credit card records all transactions and gives you something to show to the taxation authority when you’re audited.

A business credit card can also give you additional tax deductions. The balance on a business credit card is the only credit card interest that can be deducted for a business expense.

Since you won’t have a financial background when you first start a business, you won’t be able to get a business card. A possible solution is to use a separate personal credit card and use it only for business purposes. Consult your accountant for more details.

7. Make it official

It’s a good idea to establish a separate entity with a private limited company (Sdn Bhd) or limited liability partnership (LLP) for your business. Consult with accountants, tax advisors, company secretary, insurance agents and financial planners to weigh your options.

Explore which entity sounds the most reasonable and how this business is likely to affect your financial plan, taxes and what sort of insurance coverage you should look out for.

8. Prepare proper documentation

Each and every business-related expense should be clearly documented on paper. Everything should be on receipt.

For example, while on business, you stayed at a hotel. This expense should be documented along with the purpose of your business. If you spend money for business entertainment purposes, the bill should be documented stating the name of the client you’re entertaining. There should not be any transaction without written documentation.

When your utility and grocery bills are stored in the same box with invoices and business receipts, you’ll have a huge mess on your hands come tax time. Separate business and personal records can solve this issue.

Physical business records – mail and receipts, as well as digital data such as emails, word files, spreadsheets and posts from social media – all should be on paper.

When you track all your finances separately, you know exactly where your business money and personal money go and you can make better financial decisions.

Undoubtedly, a vital feature of a successful business owner is to have a clear understanding of financial management. After all, if you have no money, you have no business.

This article first appeared in kclau.com

KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.