10 Tricks to Keeping Personal and Business Finances Apart
It's easy for your personal finances to get tangled up with your business finances. But no matter what type of business you're running, it's a good idea to keep your personal finances separate from those of your business. For one thing, doing so will make it much easier figure what you can deduct and what you can't at tax time, and it will also make it easier to grow your business or even sell it.
Don't worry if you haven't yet separated your records into personal and business stacks; it's never too late to start.
1. Set up separate checking accounts. If you've got separate checking accounts and you are diligent about drawing on the right account at the right time, come tax time, all you have to do is review your bank statements for a clear picture. If you can manage to only use your business debit card and avoid cash, you may even be able to do your taxes and other financial reporting straight off your bank statements.
2. Keep separate shoeboxes for your receipts. You don't need to actually use shoeboxes to store receipts (in fact, something a little more elaborate is a good idea), but whatever you use should have two physically separate locations for personal receipts and business receipts. If you don't have time to collect and sort both personal and business receipts, prioritize your business receipts. The simple truth is that a tax auditor is unlikely to care much about your personal expenses, but will be very interested in your business receipts.
3. Get a credit card for the business. A business credit card will help you build up a credit history for your business separate from your personal credit history. More importantly, your credit card is one of the likeliest places for your finances to get muddled. Separate credit cards means that even if there's something a little out of reach of your business' current budget, you won't be tempted to use your own credit card.
4. Give yourself a salary and don't exceed it. If you write a check for the same amount every month from your business' checking account to your personal checking account, you can make it easier for both your personal finances and your business finances to stay on budget.
5. Set a budget for the business. Just as you don't want to pull more money out of your business than your business can afford, you don't want the business to pull more money out of you than you can afford. Many small business owners find themselves pumping money from their personal accounts into their companies whenever there's a shortfall. And sometimes it's unavoidable. But if you have a clear budget based on your business' current earnings, you can help avoid both.
6. Make sure your family and partners understand the business' status. It's important to remember that you're not always the only person involved in either your personal finances or your business' finances. Making sure that everyone is on the same page now can prevent problems later on.
7. Understand who is a business expense and who isn't. Among the biggest pitfalls in keeping your finances separate are entertainment, food, and travel expenses. It's tempting to try to write off as much as you can as a tax deduction, but the simple fact is that dinner out with family and friends will not qualify as business expenses, no matter how you arrange things.
8. Draw lines between your home and your office. Create a division between your office and your home, especially if you work from a home office. Doing so lets you claim the home office deduction as well as divvy up bills. Even if you have a home office, your business shouldn't be paying the entire electrical bill for your house, after all. At least part of that burden should fall into your personal finances.
9. Keep logs of business use. If you use a personal item, such as your car or your cell phone for business purposes on a regular basis, you should be keeping track of the split. Of course, life would be easier if you could have a separate car and a separate phone just for your business, but if that isn't possible, there are plenty of easy logging tools to use, especially for smart phones.
10. Talk to a financial professional. If you are at all concerned that you are misclassifying an expense or you're having a hard time keeping your finances separate, bring in a pro. He will likely be able to help you establish a system that works for your own individual situation.
Keeping your business and personal finances separate is important to the welfare of both you and your business. Not only can you be asked to show that they are separate when applying for a business loan, but doing so can keep you out of a lot of trouble. If, for instance, you've set your business up to limit your liability, but let your personal and business finances mingle, a judge can declare that your liability is not limited — that you and your business are effectively the same person. So taking the time to separate out your finances may seem like a hassle in the moment, but if something comes up, you'll be glad you did.