Separating Personal and Business Finances
If you are self-employed, you are your business.
Everything and everyone tells you that when you sell your services or products you are really selling yourself. Your personality and expertise are some of your greatest strengths, as they can land you clients, allow you to explore new avenues, and put your own twist on projects. But, you can also be your biggest liability when it comes to your finances.
By using personal assets for business endeavors and business finances for personal use, you are muddying the waters especially come tax time. The IRS allows many deductions for small business owners, but the proper paperwork must accompany it and if you are mixing finances, it may be more difficult to follow the paper trail.
Combining your finances can also be problematic when thinking about loans and debt. Many people use personal loans to subsidize the up-front costs of running their business which increases personal debt. The same idea can be applied to your business debt. Perhaps your business is going through a bit of a downturn, as many start-ups do, and you don’t want that debt to be tied to your personal bank account.
Financial well being is important to every business owner. I’d like to show you some easy ways to keep your business finances and personal finances separate.
1. Make Your Business “Official”
You have been making excellent strides to grow your solopreneur gig and now that you have, it is time to give your business a legal identity. There are many options to choose from like a corporation, sole proprietorship, or LLC. Look into each option to see which suits your needs best.
Your next step will be to apply for an EIN or Employer Identification Number through the IRS. This number will help track your business expenses and will be crucial come tax time. Don’t worry, it is a simple process and completely free!
By giving your business a legal entity you are protecting yourself against debts and lawsuits and giving your business the opportunity to grow faster. This legal status will also help you attract clients and provide a solid foundation to expand.
2. Give Your Business Money a Home
As opposed to funding your business from your own personal accounts, give your business finances their own personal address with separate bank accounts. You can open a business account with the same bank you use for your personal accounts which can make it easier to transfer funds or you can shop around for the best rates. When looking at banks, be sure to think about a few key points.
Minimum account balances
When you have the physical separation of bank accounts, you are able to look at your business finances more objectively and get a realistic sense of your profit and spending. Remember, it is really important that you use your business checking account for business purposes only. If you are strict about that, you will set yourself up for success.
3. Open a Business Credit Card
After you have established your business bank account, it is time to open a business credit card. This card will allow you to keep track of your business expenses and draw a clear line between personal and business finances. If you use your personal credit card for brunch with your friends and for a prospective client lunch, you will have a tough time differentiating between the two, especially in terms of tax deductions.
With a business credit card, you can book flights to conferences, travel expenses, meals, and business supplies. This separation protects your personal credit while allowing you to broaden your business credit. Healthy business credit can be especially helpful when you are looking for loans and future expansion. Of course, you can use the debit card associated with your new checking account until you are comfortable with a credit card (cash flow needs to cover the charges!).
4. Keep Receipts
When you own your own business, it can be tough to keep track of every expense: the paperclips from Staples, the new lamp from Target, the updated laptop, or even the upgraded internet package. All of these costs are put toward growing your business; therefore, it is important you have the documentation to back that up.
Keeping your business receipts is critical for your organization. Buy a binder and learn to commit, because your receipts tell the buying history of your business which will be important if your business gets audited by the IRS. There are numerous apps that can help with getting rid of the paper files as well. Make sure the files are backed up to the cloud and not on your computer. Also, if you use an online program or app makes sure you can take your files with you if you need to changes providers.
5. Pay Yourself a Salary
Now that you have a legal business entity, separate checking accounts, and different credit cards, it is time to think about how you want to get paid. Since you own your business, you can decide how much money to pay yourself each month. It is so easy today to just transfer funds to yourself these days, but don’t dip into the account if your finances are running low, wait for the next “payday” if needed.
Establishing a healthy financial practice for your business allows you to spend less time sifting through documents and more time doing what you love.
Helping creative entrepreneurs feel safe and secure with their money is my passion. I would love to talk with you about the best way to establish your business finances, give me a call!