Learning & Insights
Keeping business and personal finances separate
As a small business owner, every CPA will tell you to keep your business and personal expenses separate. Easier said than done, right? Let's look at some easy ways to get you on track.
Make your business a separate, legitimate entity
If you haven’t already done so, incorporate your business or establish it as a limited liability company (LLC). Then, you’ll need to apply for an Employer Identification Number (EIN) through the IRS’ website—it takes only minutes to do. Your EIN is like your business’ Social Security number and is critical for taxes and other legal issues.
Open a business checking account
The best way to keep your personal and business expenses separate is to use a business checking account to pay for all business transactions. At first, keeping two or more accounts may seem a little cumbersome, but if you're diligent, it will give you a clear and complete picture of your business expenditures. When tax time arrives, you’ll simply need to review your account statements. You should talk to a reputable and trusted CPA to make sure you have a clear understanding as to what is and isn’t considered a business expense.
Open and use a business credit card
If you need to purchase business supplies, inventory, or maybe pay upfront costs for a larger item, using a business credit card is a great option. And, if you make your payments on time, you'll develop a strong business credit profile that will boost your borrowing power over time. As with a business checking account, a business credit card makes it easy to review your business expenditures at tax time and keep better records of your bottom line.
Pay yourself a salary
While you may think this sounds silly (you own the business after all), it's important for you to write yourself a check each month from your business checking account and deposit it into your personal checking account. Or, you can simply transfer this amount from your business checking account to your personal checking account. Then, try to live within that salary.
Keep track of personal items used for business
As a small business owner, it's highly likely you're driving the same car to the grocery store as you do to a client's office. The same goes for your mobile device and any other personal items you use for business as well. It's important that you talk to your CPA to find out what's tax deductible and how to keep the right records.
Why is it important to keep business and personal expenses separate?
Simply stated—it makes your tax experience much better. Unless you're a sole proprietor, you're required to file a separate tax return for your business. Keeping your business and personal expenses separate makes this much easier to do. And, if you're ever audited by the IRS, you'll have the records needed to show why you did what you did—and that your business isn't just a hobby.
Keeping your personal finances separate from your business also gives you a stronger professional image. When you pay for supplies or other needs using business accounts or credit, your suppliers, vendors and even customers may feel more comfortable doing business with you.