Keeping all of your financial responsibilities combined can lead to problems. Regardless of the type of business that you are running, it’s important to make sure that you separate your personal and business finances.
There are so many benefits to doing this. You will ensure that you can easily figure out what you can claim as an expense and what you can’t when filing your taxes. It will also make it easier for you to facilitate business growth or even sell your business in the future.
If you have been running your business for some time and haven’t yet separated your records into personal and business categories it’s not too late for you to start separating your finances. We're here to help you figure out how.
Set Up Separate Bank Accounts
Having separate checking accounts makes it much easier for you to determine what’s yours and what belongs to your business. When it comes to tax time, all you will need to do is review your bank statements for a clear picture, rather than trying to filter through one bank account where there’s a whole mixture of business and personal incomings and outgoings.
If you can avoid paying in cash for business expenses and only use your credit card or bank transfers, you might even be able to do financial reporting and taxes just by going through the bank statements for your business account.
When tax season comes around and you have to deal with your personal and business finances, using a service like TurboTax is incredibly helpful. With TurboTax, you can file your individual taxes online easily. And then when it comes time to take care of your business, you can use TurboTax Business to help. Find out all the ways TurboTax can make filing your taxes easier!
Incorporate Your Company
While you don’t have to incorporate your company if you are working as a sole trader, it makes it a lot easier to separate things when it comes to your business and personal finances. Setting up as a limited liability company means that your business is a separate entity to yourself. Therefore, you cannot be held personally liable if your company owes money or gets sued.
No matter how many steps you take to avoid these situations, you can’t assume that they will never happen. Many business owners start with forming an LLC to keep their finances separate from the start.
Pay Yourself a Salary
Instead of taking random amounts of money out of your business to pay yourself, get into a habit of paying yourself a salary like you would any other member of staff. If you keep your finances separate, you’ll also find it easier to budget both for your business and personal life when you’re earning the same amount on a monthly basis, just as you would when working in another form of employment.
Get a Business Credit Card
While your personal credit history might be taken into account if you are getting a loan or other line of credit for your business at the very beginning, it’s a good idea to get a business credit card to build up a separate credit history for your company. Additionally, it can be easy to get carried away making business purchases using your personal credit card, so having separate cards for each will make it easier to avoid the temptation of using your personal credit card to pay for things on behalf of your company.
Clearly Divide Your Home and Office Space
Even if you are running your business from a home office, it’s good practice to keep your work and personal lives as separate as possible. This way, your business won’t accidentally pay all the utility expenses for your home, as it will be easier for you to determine what is being spent on your office space versus your living space.
As a bonus, separating these spaces will make it easier for you to get in the work mindset even when you are working from home.
If you need more of the best work from home tips, read our article This Is How You Work From Home Like A Pro.
Have a Clear Budget for Your Business
The last thing that you want is for your business to end up overspending, and you don’t want to end up putting so much of your personal money into the company that it becomes difficult for you to cover your own expenses. Many entrepreneurs end up using personal accounts to make up for shortfalls in their business from time to time. Sometimes, this is unavoidable.
However, having a clear business budget based on the amount of money that is coming in will help you reduce the number of times you need to use personal money and the amount of money you part with.
If you're new to budgeting and need some help, I recommend using the tool You Need A Budget. As I'm sure you can guess, it's a site that will help you create your budget. You will learn the basics of budgeting, get inspired to do your own budget, and have all the support you need to be successful. And the best part is that you can try it for free for over a month. Sign up for You Need A Budget now!
Be Frugal With Business Expenses
It can be tempting to try and write off as many expenses as possible to get a tax deduction, but bear in mind that things like going for dinner with your family or friends won’t qualify as a business expense. Food, entertainment, and travel can be tricky to determine when it comes to deciding whether or not they can be classed as business expenses—make sure that you truly are doing it for the benefit of the business before you put it down as a business expense.
No matter what kind of business you run, keeping your business and personal finances separate will make it a lot easier to manage.