Every accountant will tell you the same thing: always keep your business and personal expenses separate. Also, each small business owner or one-person operation will nod her head and agree wholeheartedly. Meanwhile, back to business as usual.
It can be hard to do. As sensible and logical as it sounds, and as highly recommended as it is, it is not easy for the entrepreneur to carry out. They often have a very rough and tumble life in the marketplace. It can be difficult deciding where your personal day ends and your business life starts. Moreover, when cash is hard to come by, it makes sense to rob Peter to pay Paul and vice versa.
However, there are consequences to this mingling of moneys. The tax people do not like it. Your accountant gets mad. Your business suffers.
Keep them happy and your business prospering. Here are five ways to ensure that your business money stays separate from your personal money.
Best Practices
- Keep two bank accounts: a business account and a personal account.
This is the basic way you can make sure the money from your life does not get mixed up with your business operations. If you put money into the correct account and take it out of the proper account, you are home free.
One of the first things the IRS looks for is a separate business checking account.
- Have two sets of financial record keeping, one for business, and one for personal.
Most small businesses use a system like Quicken, Microsoft Money, or QuickBooks for their accounting. So do many households. Be sure that you keep the record keeping entirely separate.
This is essential for tax reporting purposes and also improves your financial organization. If you do not know where the money is going in your business, you cannot tell if you are making a profit.
With a complete record from your financial reporting system, everything is in one place, listed by date and category. It makes filling out tax forms easy.
If you leave the separating out of expenses, from personal to business, until March or April, you stand a good chance of making mistakes. It also requires major amounts of time that could better be spent running your business.
- Get a business credit card.
Small companies and one-person operations often have trouble qualifying for a business credit card, but keep trying. It is a help for record keeping, gives you proof of expenses when the IRS comes calling, and also builds your business credit history.
You can also get a deduction on your taxes with a business credit card from any interest charges.
- Incorporate.
This is the complete way to ensure that your personal and business expenses do not mingle. As a separate legal entity, your business will have its documented life. Two of the most popular and useful incorporation structures for a small business are the LLC and the S corporation.
It is best not to do this as a do-it-yourself project. Get a team composed of lawyer, accountant and financial planner to help you decide which form makes the most sense for you business needs.
- Pay yourself a salary.
This is easy if you have incorporated, but is advisable even if you are a sole proprietorship. Pay yourself a wage. Don’t go over that amount with your personal expenses. Exceeding it just encourages you to dip into business funds to pay your current grocery or rent bills.
When tax season rolls around, each of these five practices will make filling out forms easy and headache-free. Your company’s finances will be well-organized, enabling you to have a clear view of how it is doing, where the weak spots are, and where it is excelling.