It’s important for any business to separate personal and business finances as early on as possible. It makes tax time easier and protects your personal assets and credit score.
This will help you avoid legal and financial penalties. Separating your finances is not difficult and only requires a little effort to begin.
1. Establish a Business Bank Account
Whether you have a business partnership, are an S-corp or C-corp, or are simply a self-employed sole proprietor, it’s crucial to keep personal and business expenses separate. This is true even if you’re not required by law to do so. Separating your finances helps you organize your records, streamlines tax filing during the year, and can protect personal assets if you’re ever audited by the IRS.
The easiest way to separate your business and personal finances is to open a business bank account for your company. It’s important to find a bank that offers a business checking account, debit card, and other products tailored for businesses. You can usually apply for a business bank account online or over the phone, though some banks may require a visit in person to verify your identity and address. Compare the fees and benefits offered by different banks to find the best one for your company.
You’ll also want to consider opening an additional account for your business, like a savings or money market account. This can help you track your company’s earnings over time and provide a good foundation for your company to grow. You may want to choose the same bank for your business and personal accounts for convenience, but it’s important to shop around to get the best rates and services.
Once you’ve established your business bank account, it’s a good idea to deposit all your company revenue into it each month. This comes straight from an expert at Bottom Line Bookkeeping. From there, you can pay all business-related expenses and track your company’s earnings. Additionally, you should regularly pay yourself from the business account. Treat this payment as you would a paycheck from your employer to avoid blurring the lines between personal and business finances.
2. Register Your Business
Separating your personal and business finances is a critical step to managing your company the right way. Once you have a clear separation between the two, your bookkeeping will be cleaner, tax reporting will be easier come filing time, and you’ll have a better picture of how your company is financially doing. There are also additional benefits to separating your personal and business expenses, including legal protections and a better chance of getting a business loan.
The first step to separating your personal and business finances is registering your business as a separate entity. Whether you operate a sole proprietorship, an LLC, or a corporation, registering your business gives it its own legal identity and allows you to get an Employee Identification Number (EIN). This EIN is like a Social Security number for your business, and once you have one, it’s time to open a bank account.
Keeping your personal and business expenses separate is a key step to protecting your personal assets from being used in the event of a lawsuit or bankruptcy. If you’re not careful to maintain this separation, your personal assets such as your house, car, cash deposits, and retirement accounts could be on the line if you are sued for any reason related to your business.
While the process of separating your personal and business expenses may seem daunting, it’s important for all entrepreneurs to take these steps early on in order to protect their personal assets and have a better understanding of how their company is performing. Taking these steps will also help streamline tax season and make it easier to apply for business loans in the future.
3. Open a Business Credit Card
Having your business’s expenses separated from your personal spending is one of the best things you can do as a new small-business owner. It will help your accountant when tax time comes around and it can also prevent errors that can occur when mixing the two. The simplest way to separate your expenses is by opening a business credit card. This will allow you to record all your business-related spending in a single place and can even help you earn rewards on the purchases you make for your business.
Unlike personal cards, many small-business credit cards don’t report account activity to consumer credit bureaus unless you default on the account. This makes it easier to build business credit and keeps your personal spending and credit scores completely separate. In some cases, businesses with limited credit history can qualify for a business card even before they’ve earned their first dollar in revenue.
As an added bonus, a business credit card can offer some tax benefits that personal credit cards don’t provide. For example, some cards may have a 0% APR period and/or reward categories that can be used for tax-deductible purchases.
Keep in mind, however, that opening a business credit card can affect your personal credit score if you’re not careful to pay off the balances on time. Likewise, some of the consumer protections offered by personal credit cards (like limits on interest rate hikes and prohibitions on charging late fees) don’t typically apply to business cards.
4. Pay Yourself a Set Amount Each Month
If you use the pay yourself first budgeting method, any money left over after paying expenses and debt payments goes directly to savings. This helps you prioritize your savings and can help you achieve longer-term financial goals, such as buying a home or saving for retirement. It can also be a good way to build an emergency fund or save for unexpected expenses.
To implement this strategy, you need to determine what your monthly income is and how much you can afford to save. This can be easy if you’re salaried, but it can be difficult if you are self-employed or an hourly or tipped employee.
You’ll then set up your savings account so that a certain amount of each paycheck is automatically routed to that account. Then, you’ll take out your necessary monthly expenses and discretionary purchases before you begin spending any remaining money. Practicing this technique promotes increased and consistent savings and investment, and it encourages frugality as well.
Keeping personal and business finances separate can be a challenge, but it’s essential for maintaining a clear financial picture. It also reduces the risk of mismanaged funds and prevents issues when it comes to filing taxes or being audited by the IRS.
Although it takes time and effort to establish a separation between your business and personal finance, this step is crucial for protecting your assets. Whether you’re just starting your business or have been operating for years, it’s never too late to start separating your personal and business accounts. To learn more about keeping your business and personal finances separate, schedule a free call with the DiMercurio Advisors team today. We can explain the benefits of separating your personal and business finances, provide tips on how to get started and answer any other questions you may have.
5. Keep Business Receipts Separate
Whether you’re an employee or a business owner, separating your personal and business finances saves you time and money in the long run. It helps you keep track of potential tax deductions, stay legally protected and lowers the risk of an IRS audit. Maintaining that separation goes beyond simply creating separate bank accounts. You also need to be careful when spending, tracking your expenses and storing receipts.
Small businesses acquire their funding in one of two ways: either by securing loans or raising capital from investors. They then spend that money on a variety of things to make their operations productive and profitable. When personal and business expenses are commingled, it’s difficult for small business owners to identify which ones are deductible and which aren’t, which can result in unnecessary accounting fees.
If you’re not careful, mixing personal and business expenses can even get you into legal trouble. The IRS will want to see your business receipts and, if you can’t provide them because they are mixed up with your personal expenses, you could be fined.
By implementing these simple steps, you can establish a clear line between your personal and business expenses, which will streamline bookkeeping processes and ensure accurate financial reporting. It will also help reduce the risk of triggering an IRS audit and protect your personal assets. By taking advantage of the tax benefits and minimizing financial compliance risks, you’ll be well on your way to achieving business success! Ready to learn more about establishing a strong foundation for your small business? Contact us today to discuss the different structures, including sole proprietorships, LLCs and corporations. We can help you choose the right one for your unique needs and goals!