Now that we understand the importance of dividing between personal and business finances from our last article (read here), let’s get started on how to separate your personal finances from your business finances.
Determine How To Structure Your Business
The first step, if you are new business or have yet to legally register your business, is to establish a legal structure for your business. This is the most important step to take in separating your finances. The legal structure of your business will dictate your risk and liability, and how the IRS will receive your business taxes. Some structures include a sole proprietors, partnership, LLC, corporation, and small business corporation.
Depending on the corporate setup of your business, you can, in fact, be held personally responsible for company debts, including seizing assets to satisfy creditors. In order to make the best decision, take the time to discuss your options with an attorney, CPA, and financial planner.
Maintain Separate Accounts
The ability to distinguish between personal and business finances is critically important. Creating an individual account for your business will help to tell the difference between personal and business expenses, as well as assist your case if the IRS ever questions the legitimacy of your business.
Pay Yourself A Salary
Paying yourself a regular salary can help business owners isolate the line between business and personal profits, instead of randomly pulling money from their business. Providing yourself with a regular paycheck will not only better the chances of your business succeeding, but keeping you on your personal budget.
Track Shared Expenses
The best way to steer clear from being audited is to track shared expenses. Separating receipts for your business expenses is vitally important when running a business, as co-mingling has the potential for dire tax consequences. The most efficient way to track expenses is to use separate credit cards and checking accounts. For business expenditures use your business credit or debit card or checks, while personal expenses should be taken care of through your personal banking account. Their are several apps and programs that help track expenses and keep digital receipts.
Dividing personal and business finances is the first step to transforming a business idea into reality. Once your company becomes a registered entity, your idea of owning a business becomes reality — and separating finances will help to ensure it grows and succeeds.
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