For a small business owner it can be tough to keep your business and personal finances separate because, well, you are your business! You live it and breathe it; and chances are, you have a passion for your business that most of your W-2 earning friends don’t have for their own jobs. Keeping your business expenses separate is particularly challenging when your business is new. It may even feel a little silly when you’re not even sure if this thing will even take off. However, the earlier you make this a priority, the easier you make things for yourself down the road.
Why it’s Important
- Tax time will be a huge pain if you have to painstakingly go through your personal account to hunt down business transactions.
- Also regarding taxes having your business finances separate allows you to take advantage of all possible deduction opportunities.
- Protect yourself from any potential legal situations – a LLC, S-Corp, or C-Corp structure is designed to protect you, however, if you don’t keep finances separate a lawyer could argue your business is not truly a corporation.
- You need to be able to show proof of your business’ performance for the purpose of getting a business loan or investment capital. Further, you’ll want this information yourself for ongoing business planning.
- If you wish to get any kind of personal loan, you’ll need to be able to show documented income coming to you from your business.
What You Need to Do
- Most importantly, it is imperative to have a separate business bank account. If your business requires a credit facility, open a business credit card. Even if your cash flow is sufficient to cover all business expenses, a business credit card is a good idea from a convenience and tracking standpoint. Any payment made to your business should be in the business name and deposited into your business checking account. Any business expenses should be paid from either the business checking account or with the business credit card.
- Maintain a separate filing system for business items such as receipts and invoices. Whether you maintain a meticulously organized electronic filing system or go the “shoebox” route, the point is to have a separate shoebox from the one with your personal stuff.
- Set up your bookkeeping method. Many small business owners find software such as Quickbooks to be comprehensive and user-friendly enough to do it themselves. However, if you need (and can afford) outside help, consider hiring an accountant or look into Virtual Assistant options.
- Decide how to pay yourself. Either write yourself payroll checks from the business checking account or transfer funds electronically – however, with the latter option, be sure this is tracked accurately in your accounting system. In the early stages of your business, you may not be able to pay yourself on a regular payment schedule, however, make it a goal to do so as soon as you can. It will help you to get personal loans when you can show a regular, steady income flow.
The time to start being diligent about compartmentalizing business finances is Day 1. Your future successful-business-owner-self will thank you. As the old saying goes, “an ounce of prevention is worth a pound of cure!”