The 2 most important reasons to keep your business and personal finances separate are:
1) to protect yourself PERSONALLY from legal liability that can arise from BUSINESS debts and lawsuits, and,
2) to make accounting for your business infinitely easier and, as a result, save you time and money.
Now that we know why it’s important, here are 3 ways to keep your business and personal finances separate:
1. Speak with a Tax Accountant or lawyer for advice on which legal entity or structure is right for you
This will set tone for others you do business with (such as customers, the state, the federal government), but most importantly, yourself. When you set up your business as a business, you treat it like a business; and this provides a proper separation.
Some of the common entity choices for entrepreneurs are sole proprietorships, Limited Liability Companies (also called LLCs), and S-Corporations.
A sole proprietorship is a single-owner business and not a separate legal or taxable entity. It is the easiest to set up because there is no formal filing required. Just remember that you retain personal liability for any business debts.
A Limited Liability Company requires some formalities to set up, but it does offer limited liability. It provides for pass-through taxation where your business revenues and expenses flow into your personal tax return. LLCs can also elect to be treated as an S-Corporation for taxes. Please check with your advisor as requirements vary by state.
An S-Corporation offers some of the benefits of a C-Corporation such as limited liability and single taxation. There are, however, some disadvantages such as the formalities and requirements to set it up.
Ask your advisor to explain the advantages and disadvantages as they relate to your specific business in terms of legal liability, taxation, and difficulty of forming the entity. You can also check out your state’s Secretary of State website for more information.
2. Open a separate bank account, business credit card and/or PayPal account for your business
This will make it much easier to do your taxes and prepare financial statements. No more sifting through all your receipts or online orders to find your business expenses; you can just download your business bank or credit card statement.
In situations where you have to use a personal credit card or cash, just make a note that personal funds were used and save the receipts or e-mail confirmations with all your other business receipts.
3. To know what qualifies as a business expense
Knowing what qualifies, simply makes it easier for you to track it.
You can ask your tax professional for a list of what expenses qualify for business, travel, entertainment and meal expenses and what documentation you need to retain.
The IRS also provides this information in their publications on their website www.irs.gov. Here are the links to the 2017 publications. I will update the links for 2018, once they become available.
- Publication 334 (2017), Tax Guide for SmallBusiness (For Individuals Who Use Schedule C or C-EZ)
- Publication 535 (2017), Business Expenses
- Publication 463 (2017), Travel, Entertainment,Gift, and Car Expenses
For personal assets that are used in your business, such as driving your personal car to client locations or using your personal cell phone for business calls, you will want to keep notes and logs to document and track the business usage. You can do this in a note-taking app on your phone or in a journal.
Bonus tip: Create a budget to limit spending personal money on your business!
The word “budget” sounds like a lot of work, but it doesn’t need to be! You can create a quick budget by comparing your fixed monthly business expenses (like internet hosting, advertising expenses, etc.) to the money you are bringing in. This will give you a rough idea of what you have left to spend for the month.
I hope this helped illustrate the importance of keeping business and personal finances separate and gave you some ideas to accomplish this. Just start from right where you and use these tips going forward. You can always go back to the beginning of the year to properly track everything.
And if you have found this information helpful, please leave a comment below or subscribe to my social media feeds. I look forward to hearing from you!
Disclaimer: This information is provided for informational
purposes only. I am NOT an attorney and I am NOT YOUR accountant. The information provided does NOT constitute legal, tax, accounting or any other type of professional advice. Please discuss this information with your own attorney or tax professional. We assume no liability or responsibility for any
errors or omissions or reliance on this information.
