If you’re a small business owner or entrepreneur planning to start your own company, you’ve undoubtedly heard that you should keep your business and personal finances separate. But before we go any further, if you’re not already convinced that it’s essential, look over these reasons for separating personal and business finances. It really does matter.
So, now that you’re sold, how exactly do you keep your business and personal finances separate? That’s a good question. There are a number of important steps to take to begin the process of disentangling these two areas of your money, as well as some things you should do on an ongoing basis. As an added bonus, these efforts will also let you establish and build business credit for your company.
Here’s an introduction to the basics of how to keep your business and personal finances separate. Remember, this is just general information; everyone should get personalized financial advice from a professional who can consider all the specifics of their situation and their goals.
Ways to Separate Personal and Business Finances
- Form a business entity. Whether it’s an LLC, C Corp, S Corp, or other structure, this is crucial to keeping your personal and professional finances apart. Consult a qualified professional for advice on which entity is right for you. And while you’re doing this, apply for an employer identification number (EIN) from the IRS.
- Open a business bank account. One of the simplest, most fundamental ways to effectively keep your business and personal finances separate is just to have different bank accounts for each. Then, be careful that you use each one only for its intended purposes.
- Get a business debit and/or credit card. This is another must-do step. Get a business debit card when you open your business bank account. Most likely, you’ll also want access to a line of credit for your company; have a dedicated business card for this, and don’t ever use your personal credit cards for business expenses.
- Pay yourself a salary. Don’t treat any cash on hand as if it’s your own. Take an official salary, and deposit it into your personal bank account. That’s the money you get to spend on personal expenses. If it’s not enough, re-evaluate your personal budget and/or your salary, but don’t take more money from the business than you are rightfully paid.
- Set business budgets. Just like you shouldn’t take extra money from the business for personal use, don’t use personal funds to cover business expenses. Set annual, monthly, and weekly budgets for your company, and stick to them.
- Keep your business and personal receipts separate. Don’t make personal and professional purchases in the same transaction. Use the appropriate debit or credit cards for each, and have different folders for storing receipts for each type of purchase.
- Track your use of personal items for business purposes. It’s likely you won’t be driving a company car and always using a company cell phone or laptop. Writing off expenses associated with using your vehicle, phone, computer, home office, etc. for work is one way of minimizing your tax burden. However, you need records of how much you use your personal possessions for business purposes. Keep a log.
- Educate your employees about business expenses. Do any of your employees have business credit cards or expense accounts, or make purchases for the company? Make sure they understand what qualifies for use of business funds, and the importance of always getting a receipt and putting it in the appropriate place for safe storage until tax time.
