Tips to Keep Personal and Business Finances Separate
Having a small business is great because it lets you be the boss. But being the boss means having more responsibility and there are a lot of things you must decide when you are in charge. One of the most important is a method for financial management.
As much as your business may feel like your whole life, you do need to separate your personal finances from those of the business and keep the boundaries strict. The first step to financial health in both of these aspects of your existence, business and personal life, is not mixing. Let's look at the ABCs of keeping your business organized.
Business Health ABCs
- Accounts: Even if you don't have employees and are on your own, start treating your business seriously. Open bank accounts for the business and even if you do initially need to use personal capital for business expenses, document this appropriately and keep your accounts distinct. To the extent possible you want to limit any overlap between you business and personal accounts. If you are paying yourself, make sure it's the same amount on a regular basis and clearly noted for your records and for tax purposes. You will need to have a very clear record of business earnings and expenses and separate bank accounts for your business and personal life are an absolute must.
- Bookkeeping: Good record keeping is essential to business health. Get a program for your computer -- there are many -- and make it a habit to enter receipts, invoices and all relevant information in the program on a regular basis, at least once a month. It might not sound like fun but this is a good way to have a sense of where your business stands financially every month and will save you a whole lot of hassle at tax time. Do not use shoeboxes or stuff your receipts in drawers. Your business bookkeeping need not be complex. Keep it simple. But do it.
- Credit: Don't throw business expenses on your personal credit card just because you have a $50,000 limit. It is important to have access to credit because businesses do have unexpected expenses and you don't want to blow a deal, not provide a product or service, because you couldn't afford to deliver. But you also must draw lines between business and personal finances and borrowing from you is not a good idea. It will be much easier to show an expense legitimately belonged to your business and is deductible if you've used your business credit card. When tax time comes, you'll be thrilled about the clarity.
Talk to a Lawyer
If you are starting a business or if your current business seems disorganized, talk to a lawyer. Get help setting up a system that will work for you and your business for a long time to come. An attorney can guide you on all aspects of operations.
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