3 easy ways to separate business and personal finances
Comingling funds, accounts, and assets leaves business owners and their companies at risk. Businesses are a completely separate entity and should be treated as such. Separating personal finances from businesses finances should be a top priority for managing funds in the correct manner. Here are five ways to establish separate finances:
Apply for an Employer Identification Number (EIN). An EIN is a nine-digit number assigned to companies by the IRS and is used to file your business’ income tax returns separate from your personal tax returns. This is the business version of a social security number in that an EIN is used to open business banking accounts, applying for business credit, and many other set-up functions. Your EIN also allows you to formally establish your business as a separate legal entity in the form of an LLC or corporation (an EIN is not necessary to form a sole proprietorship).
Open a separate business bank account as the cornerstone of your financial foundation. Two distinct bank accounts is the only way to keep funds completely apart. A dedicated business checking account means the business can pay bills, deposit cash, collect invoice payments, and make purchases without having to pull from your personal bank account and reconcile the two. Accurate and “clean” bookkeeping is crucial during tax time and makes processing your returns easier for your accountant too. In the same vein, acquire a business credit card. The same principle as separate banking accounts applies here. If you are using a personal credit card for any business expense, then your finances are not distinct.
Identify business versus personal expenses. Home offices, use of personal vehicles for client meetings, speaking with clients on your personal phone, and other similar activities are things that need to be noted. Tracking when personal items are used for business purposes allows for write-offs during tax season. Your staff should be educated and keeping track of these type expenses as well. Make certain everyone is on the same page on understanding the difference between a business expense and a personal expense and establish a system for tracking. If only part of your organization is tracking the distinct expenses but not all are, then there will still be issues when tax time rolls around.
Setting up separate expenses should always be done during the formation of an entity, however, if your business is established, it doesn’t have to be an overwhelming process. Consulting finance and accounting specialists and outsourcing daily functions is the most efficient way to get your financial house in order and lets owners focus on the operation and growth of their business, saving time and money on the back-end.