Most are familiar with the old saying “never mix business with pleasure.” However, for business owners both large and small, keeping in mind the mantra to never mix business finances with personal finances will serve you well. Maintaining separation can help circumvent potential pitfalls and avoid hardships during tax season, audits or even potential lawsuits against the business. Let’s discuss some key ways to help avoid blurring the lines between your business finances and your personal finances.
Establish an EIN and Separate Business Entity
When starting a new business, there are a couple of important steps to cover in separating your business finances from your personal finances. One, filing for an employer identification number (EIN) with the IRS and two, establishing a separate business entity, such as an LLC (Limited Liability Corporation) or a corporation. Taking these first two steps can help establish an initial line of separation between your personal finances and business. Additionally, establishing a separate business entity could help protect your personal assets from the liabilities taken on by the business, giving you some additional legal protection.
While setting up a sole proprietorship and filing under your personal Social Security Number (SSN) is easy and inexpensive to set up, keep in mind the type of business you will be running. You should consider asking yourself what kind of liabilities you may be exposed to should something happen within the business and the extent of damage they could entail. If there is high risk of a claim against your business or a potentially costly claim, consider establishing a separate business entity.
Maintain a Separate Business Bank Account
Tax time is already stressful. The responsibility of running a business adds an additional layer, making it even that much more important to keep business finances separate. This separation can help minimize the stress of having to try to reconcile your bank account to identify business expenditures once tax time rolls around. Keeping a separate bank account can also help prevent the appearance of commingling business assets and personal assets.
Get a Business Credit Card
Much like your bank account, opening a business credit card will help prevent you from using personal accounts for business transactions.
Having a business credit card may also help you build a stronger business credit score. That is correct, as a business owner you get a separate credit score for operation of your business. Establishing and maintaining a strong business credit score, much like your personal credit score, will increase your borrowing power should the need arise. A strong credit score will also help you qualify for better, lower interest rates.
Keep Separate Receipts and Track Them
For most of us, receipts are just another piece of paper that winds up crumpled in a ball in the center console of our car or added to the stack of other receipts piled on our dresser. Making sure that you’re storing your business receipts separately could help prevent a big headache should you ever be audited by the IRS. In this day and age of computers and sophisticated technology, setting up a business bank account and/or credit card can also help make the separation of expenditures a much easier process.
Track the Use of Personal Items for Business Purposes
Having a company that can provide you with all of your business needs is a wonderful dream. However, the reality is that this is not the case for most business owners. Most are using the same car, the same cell phone and potentially even the same space to handle both business and personal activities. As a business owner, the use of these personal items for business use can be a major money saver come tax time, as you have the ability to write off that use as a business expenditure. Need to meet a client across town? Log those miles. Are you using your cell phone to communicate on business activities? Track that use. Work with your tax professional to help identify those deductible expenses and define best practices for keeping record of your use of personal items for business activity.
Do you have employees on your payroll? Train them and make sure they know the difference between business and personal expenses. Take the time to make sure everyone involved in your business is on the same page. Staying diligent in these practices will give you the flexibility to delegate some of this responsibility, allowing you to focus on your business without those nagging worries in the back of your mind.
While this may all sound a little frightening and overwhelming, being a business owner comes with some greater responsibility than an employee. While the rewards can be greater, the time and work tends to be greater, as well. Establishing tools and habits, like those discussed here, early on in the life of your business can prevent some potentially big headaches down the road. However, it’s not too late even if you have been running your business for a while and not addressed these items. Get started right away and help relieve yourself of some unnecessary stress.