When it comes to business and personal finances, there should be no gray areas or blurred lines. When starting a business, separating business and personal finances is an important step in the right direction, putting you in a position to succeed while also keeping you out of harm's way. You'll enjoy tax benefits while also safeguarding your personal assets.
Whether you're a first-time business owner or a seasoned entrepreneur, there's no time like the present to place some much-needed space between your two world's finances. We're going to cover both the why and the how for separating personal and business financials to set you up for success.
The Importance of Separation
As a business owner, you have most certainly been told that mixing personal and business is never a good move. This holds especially true for finances. Here are five reasons why you need to separate your personal and business financials.
- Tax Advantages
- Build business credit
- Working with leverage
- Saving on time
- Your personal image
Tax Advantages
Perhaps the most important reason why you should keep your business and personal financials separate is taxes. One of the more obvious benefits is tax write-offs, but there are many other factors that play a role in the tax equation. If you want to avoid a massive headache with the IRS, you'll want to have your personal and business finances disconnected. One of the many ways to alarm the IRS of possible issues is to claim personal expenses as business expenses. So, to safeguard your business and personal assets from the unpleasant audit experience— keep these two worlds apart from one another.
Build Business Credit
One essential aspect of establishing, growing, and succeeding in business is the ability to obtain financing. However, to receive access to the wide world of loans, advances, and various outlets for capital — you're going to need to build both business and personal credit. While many business owners can take steps in their everyday lives to grow their personal credit score, building business credit can be a little more tricky.
It's made a lot easier by detaching business and personal finances. On top of the typical steps, like registering your business and keeping up with payments — it starts by not mixing your expenses. A good place to begin is by opening a business savings account.
Working With Leverage
Throughout both the business and personal financing world, leverage plays a significant role with borrowed capital. For those looking to grow and expand their company, it's all about determining if an investment's eventual success is worth the interest that comes with it. If your personal and business finances are intertwined, you could put your personal assets at risk when borrowing funds.
There's a significant difference between business loans and personal loans that you use for business. While some startup and novice business owners may have no choice, it's crucial to separate your financials ASAP. Successful businesses take advantage of financial leverage every day, and you can, too, by separating your two worlds.
Saving On Time
Whether you're planning on managing your business financials through reliable software or a designated accountant — the process is made significantly easier and less time-consuming if your personal finances aren't a part of the equation.
We've put together a list of business accounting software you should try to help you get started. If you plan on working with a designated accountant, you can cut down on billable hours by drawing the line between your financials. This will also help you mitigate how many meetings you should have with your business accountant, saving you time and money.
Your Personal Image
Being a business owner means protecting your professional image. One of the many ways to accomplish professionalism is by separating your financial accounts accordingly. Not only will this provide all of the benefits listed above, but it will also help you ascertain a business identity.
Whether you're looking to obtain investors, apply for debt financing, or simply have the business landscape take your enterprise seriously — it's crucial that you detach your business finances from personal.
How to Get This Done
We're going to give you 3 quick tips for how you can divide your business and personal finances for good, setting your company up for success while protecting your personal assets.
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Apply For an EIN
Your employer identification number is a nin-digit identifier that gets assigned to your business by the IRS. This is crucial for establishing your business, opening business bank accounts, applying for business credit cards, and much more. It's like a social security number for your business.
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Choose your entity
After you have obtained an EIN, you can set up your business entity type (S-Corp, C-Corp, LLC, etc.). We've covered some of the basics before on distinguishing between S-Corp and C-Corp. You'll have to go through a few processes to accomplish this type of business entity. Articles of incorporation are crucial, as what type of entity you land on can have a significant impact on various factors going forward.
Perhaps the biggest reason why choosing an entity is so crucial is taxes. Here's a breakdown for each business entity and how you should go about choosing your business type.
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Get a Business Credit Card
Once you have opened up a business bank account, the first thing you should do is get yourself a business credit card. Not only will this help you keep your financials separate, but it will also help you build business credit.
This is the best step for new and emerging entrepreneurs looking to build excellent business credit and expand their opportunities throughout the business landscape.
Wrapping Up
Now, this is just the tip of the iceberg when it comes to separating your financials. By now, the importance should be incredibly clear, but how to get it done may take some further education and learning.
We'll leave you with a few more tips to help you on your way.
- Give yourself a salary
- Keep business and personal receipts separate
- Teach other team members
