As the owner of a growing business, it’s imperative to create a fine line between your business and personal finances. Separating your personal and business finances comes with a range of benefits including:
- Tax reasons. Splitting your personal and business finances allows you to take advantage of tax deductions such as writing off business expenses. It will also make your life much easier in the case of an IRS audit.
- Allowing you to build your business credit. Your business credit reports and scores are separate from your personal credit scores, and solid business credit scores are necessary to secure larger business loans.
- It will make you look more serious as a business owner. Having separate credit cards and bank accounts for you and your business will make you look more professional when dealing with customers and business partners.
Ways to Separate Personal and Business Finances
Register Your Business
Your initial move should be to choose a business structure and officially register your business. Choosing the right business structure will require research as there are several types. The type of business structure you choose can affect multiple things such as your ability to raise capital, the amount of taxes you pay and the personal liability of the business owner. Incorporating your business, such as registering as a C-corporation, S-corporation, or LLC, will give your business its own legal identity separate from the business owner or other shareholders.
Incorporating your business offers the strongest personal liability protections and makes acquiring capital easier. However, incorporation also comes with heavier burdens, such as higher taxes, more administrative duties, and the requirement of rigid record keeping.
Get an Employer Identification Number (EIN)
An Employer Identification Number (EIN) for your business operates in a similar fashion to how a Social Security Number works for your personal life. An EIN comes with multiple advantages, such as helping you speed up business loan applications, the prevention of Social Security Number theft, and allowing you to hire employees. In terms of separating your finances, obtaining an EIN will enable you to open business bank accounts.
Getting an EIN is free and it only takes minutes to apply. You can apply for an EIN online through the IRS website.
Open Bank Accounts Specifically For Your Business
Open a business checking and savings account in your business’ name using your newly acquired EIN. Use it solely for business funds and transactions. Having designated accounts for your business enables you to better manage your business’ cash flow by seeing what’s coming in and going out every month. They also allow for better organization of financial records and make a business owner’s life easier in terms of taxes and tax breaks.
Apply for a Business Credit Card
A business credit card can further help you in dividing and managing your personal and business expenses. Open a business credit card account using your EIN and your business’ name. Business credit cards not only assist in managing your business finances, but they also come with an array of advantages. These include enabling you to build your business’ credit scores (when used responsibly), benefits such as insurance and extended warranties, and rewards or cash back on your business expenses.
A business credit card also stops you from placing business expenses on a personal card. Placing business expenses on a personal credit card is not advised, as personal credit cards often have lower credit limits. This means that if you max out your personal credit card with business expenses, or miss a credit card bill, you will see your personal credit scores drop. Decreased personal credit scores can take a toll on your personal life, such as making it harder to obtain credit for personal reasons such as a mortgage or car loan. Just like any credit card, business credit cards are serious financial tools that need to be treated with responsibility. This means paying your bill in full and on time in order to avoid dings to your credit scores or expensive interest.
Set Yourself a Rigid Salary
Set yourself a salary in order to stop yourself from using your business funds as your own personal piggy bank. Set up a monthly transfer from your business account to your personal account. When it comes to personal needs, avoid using your business accounts and business credit card at all costs.
Separating your personal and business finances will take time and proactivity. However, learning to keep them separate is the perfect place to start on the long road of growing a successful business. While it won’t be easy to keep both separate and clearly recorded at first, doing so will save you time, money, and potential stress in the long run.