As a small business owner, you might find yourself having difficulty maintaining the distinction between your personal and business finances. This is an important strategy no matter what type of business you have or how big it is, especially if the business is just you or you and a small group of employees. Here’s what you need to know about coordinating your personal and business finances for optimal financial health.
Why You Should Separate Personal and Business Finances
If your personal finances are connected to your business accounts, your company hitting a rough patch means your own money and credit score will hit a rough patch too-and vice versa. Furthermore, your personal and business records being intertwined will make more work for your accountant which leaves greater room for error when filing your taxes. If you apply for a business loan, you might face unexpected difficulties because they will not be able to get an accurate read on your business from just your financial statements. To get started on navigating your personal and business finances more smoothly, we recommend that you consider the following steps.
Getting an Employer Identification Number
The first step in keeping your personal and business finances separate is getting an Employer Identification Number, or EIN. It is similar to a social security number but is used to identify a business instead of a person. Once your business has this number, you won’t have to use your personal social security number for your business.
EINs are given by the IRS. They can be used to conduct many tasks your business may require, such as filing tax returns, choosing an entity type and starting up business credit cards and bank accounts.
Making Your Business Its Own Entity
Making your business its own legal entity, separate from you, can also be a good idea. There are multiple types of entities to choose from, like LLCs and corporations.
Doing this allows for at least two more benefits: being able to file the tax returns for your business independently from your own and adding more protection under the law.
Separating Your Bank Accounts and Credit Cards
Opening a separate bank account for your business is the most crucial task for keeping your personal and business finances separate. This account can be for either savings or checking, though a checking account will give you the most options.
A business bank account frees you from having to run your company with only cash or having it cross over into your personal finances. Similarly, it is also important to have a credit card used solely for your company. This serves as another separate account from your personal finances, and it is also useful for building your business’s credit score.
The credit score for your company is an analysis of how your company handles debt, but the way that it is calculated for personal accounts versus business accounts is different. Building your credit score is crucial for any business, but it is especially important for business growth.
Paying Yourself Officially
Another important step is to give yourself a salary instead of just taking money for personal use out of your business accounts whenever you see fit. All you have to do is transfer a set amount of money from your business account to your personal account at set times.
This makes a more tangible divide between the two sets of your finances, and it sets a precedent for how you will allow yourself to remove money from your business funds. It also makes taxes more simple.
Sorting Out Receipts
You must also keep your receipts for your business and personal expenses separate. If your company is ever audited, the IRS needs to inspect your receipts, and if you provide the business receipts, you may fail to contest what the IRS is claiming. This task is much simpler if you already use separate bank accounts and credit cards.
Remembering Personal Items
Make sure you know when you are using personal items for business activities, because if you keep a good record of this, you may be able to write off some of those expenses when you file your taxes. Working in an office in your home, using your own phone to make business calls and making business trips in your personal vehicle are all included in this situation. You should also make sure you are not spending business money on personal expenses.
Ask an Advisor to Help You Get Started
Navigating your personal and business finances can seem like an overwhelming challenge. However, the experts atInflection Advisors would be happy to learn more about your personal situation and offer customized guidance to get you set up for success. Reach out to learn more or to schedule an appointment to get started.