A lot of things should never mix in our life. Drinking vs driving or business vs pleasure is easy examples. Two additional things that shouldn’t mix are your personal and business finances.
Business expense management is hard work, requiring a lot of error corrections and clarifying financial positions. Knowing where to draw the line between your expenses and your business expenses can save you a lot of time and money. Separating your business and personal finances help clear up your tax situation such as tax deductions. It also makes it easier to track and record your business expenses. You can take a look at a handy online calculator to estimate the tax return cost of your startup.
Here are 6 clever things you can do to make sure your finances are isolated from one another. These tricks will save you a lot of grief.
This is a collaborative post.
Table of Contents
1. Create A Real Business Entity
For those looking to start a business, the first step is to create your business entity. Legitimate businesses have their own registration information, from their own tax numbers to their own utility accounts. It creates a clear delineation between its owner and the business itself.
Apply for your Data Universal Numbering System (DUNS) number. Your DUNS number will be a crucial requirement when applying for business credit. Once you have everything ready, pick your business entity type, start a business checking account, and get a business credit card.
Once you establish your business, consider what type of entity you want. Your best choices are between a limited liability company (LLC), incorporation or a company. Each has its own advantages and, depending on your needs, can fit your requirements.
Maintaining a corporate structure allows for the business to protect itself from your personal liabilities and vice versa. It also keeps you away from potential lawsuits and losses that the business may incur.
An Employer Identification Number (EIN) is also an important step toward legitimizing your business.
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2. Build a Business Account
The best way you can separate your business and personal finances is to create separate accounts for either. Create an account that you use only for your personal expenses, and others where business earnings come in.
By keeping both accounts isolated from each other, you keep your business legitimacy while making it easier for tax entities to scope your business finances.
Your business checking account should only be used for business expenses only. Have enough discipline to prevent mucking up your finances, which can cause complications down the line.
Don’t treat your business account as your piggy bank. You can assume that the money in it is not yours.
Separating personal and business finances can give you a clear picture of your money once tax season starts. Your work will be a matter of keeping business records neat and tidy, rather than following a trail of crumbs.
Another way to keep everything separated is to register utility accounts in the business’ name. This benefits you in a number of ways, including the further establishment of your business identity. It’s proof that your business is operational, which is important when you start building your credit.
If you want to go further than simply separating your finances, start another personal account and save for retirement.
3. Hire A Certified Public Accountant (CPA)
Effective accounting means having the right tools and know-how when tracking your personal and business expenses. Not everyone, however, is keen on handling their taxes and the cash flow within the business. Hiring a certified public accountant (CPA) will help provide you with crucial bookkeeping.
Improper bookkeeping will cost you money in the long run, with losses incurred from the improper calculation of tax credits and misfiling. With a CPA, you align your goals with your needs and allocate the right resources for the business. They can also give you privileged financial advice, which many need.
If you’re also shooting for investors, a certified public accountant can help organize everything you need. They will deduce the financial compliance documents you need. Your job then would just be operating the business and keeping it profitable.
4. Set A Salary For Yourself and Stick With It
In most businesses, success comes from the ability to control the flow of income. Many think that profits are there to line the pockets of the owner – and they’re partially right. The real point of profit, however, is for it to go towards the growth of the business.
If you’re looking to be the boss, you don’t have to have all the business savvy in the world. However, you have to set a salary for yourself to separate yourself from the business’ income.
Employ yourself and set a salary that is reasonable for the work that you do. You can even add a title for yourself, usually as the president or CEO of the business. Use your salary for your daily expenses at home.
Don’t filter money from your business account to yourself to help your business keep its own income. Keep yourself at a steady pay cycle, rather than using company money.
Exercise discipline and avoid using the business checking account and business credit card for yourself. Grow your business and act like a proper business employer. Company money is company money regardless, so its money is not yours.
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5. Get A Business Credit Card and Use It For Business Expenses Only
Business credit cards are a handy financial tool that can help your business build credit. Much like how you build your personal credit, it’s important for your business to start building a credit line and initiate your credit history.
In many situations, the company credit card is the biggest problem for many proprietors and newbie business owners. Much of this list underscores the need for discipline, and the same is true for a business credit card.
Use the business credit card only for qualified business expenses. If you have an accountant, discuss what expenses you can have as a tax write-off. If you have to buy something out of reach for your business, use the business credit card. Never use your personal credit card to buy materials for your business.
6. Keep Business Partners and Family On The Same Page
A common downfall among disciplined business owners is the people around them. Business partners and family members who don’t understand the nature of the business may have the tendency to abuse their influence over it. Keep family and partners abreast with the business’ status as much as you can.
Keep everyone on the same page. Be transparent with current business operations. Keep family and friends away from business finances too if they have zero involvement in daily operations.
Transparency also prevents potential financial troubles from creating trust issues within the business.
Stay in contact with stakeholders within the company and make sure you follow your business’ budget. Keep your personal money where it is and never bolster your business finances with personal money unless it’s an absolute emergency.
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Separate Your Personal and Business Finances Now
Protect yourself and your business by making a clear financial separation between you and your business entity. There are growing pains to a company but if you can mitigate personal loss or lawsuits, you should be well on your way to business growth.
Following these easy steps will help you to get and keep more of the rewards of your hard work. These tips may sound like common sense to you but these are crucial in protecting your assets.
More about the Author
Bash Sarmiento is a writer and an educator from Manila. He writes laconic pieces in the education, lifestyle, and health realms. His academic background and extensive experience in teaching, textbook evaluation, business management, and traveling are translated in his works. Connect with Bash on Instagram and Linkedin