Many entrepreneurs find that the line between business and personal blurs a little bit. It can be especially difficult to maintain the separation between business finances and your personal money management when you own a home business or offer services like freelancing.
Why You Should Keep Personal and Business Finances Separate
First of all, it’s important to keep your personal and business finances separate. You might think that it doesn’t matter that much (it all goes to the same place in the end), but it is an important distinction.
The IRS definitely makes a distinction between your business and personal finances. If you use items for personal purposes, you can’t deduct them as business expenses and use them to offset your business income. Being able to separate out your personal and business finances is an important part of making sure that your taxes are accurate, and that you reduce the chances that you will be subject to a tax audit.
Your record-keeping is also less complex when you start at by keeping your finances separate for your business and your personal needs. You don’t want to end up with extra book-keeping problems by mixing it all up. Having it all separate makes it easier to analyze your budget categories and plan for the future, on top of being smart practice when it comes to the IRS.
One of the first things to do when you start a business is to open at least one business bank account. Opening a bank account is fairly straightforward, as long as you have the documentation you need, which for a business account might include proof of your business from your state, and/or proof of an EIN from the IRS.
A business checking account is an obvious choice, and you might want to open a business savings account as well. Other accounts you might need as a business include those for retirement accounts and other benefits accounts, if you know that you will need them down the road.
Once you have a bank account, use it to manage business transactions. Business income should be deposited in your business bank account. Likewise, expenditures for your business should come out of this account. Even if your money just passes through your business and almost all of it ends up in your personal checking account, you need to move your money through the business account. It creates an extra step to put the money into your business account first, and then move it from there to your personal account, but it’s an important step that helps with record-keeping.
Business Credit vs. Personal Credit
Don’t forget that you need to treat your business as an entity separate from you. This means getting a business credit card for your business and using that to complete business-related transactions.
Even if your business credit isn’t established enough to qualify you for a card, you should still find a way to separate those transactions. Designate one of your cards for your business so that, at the very least, you are using a different card for business-related purchases. You can work on building your business credit score over time so that you don’t have to rely so heavily on your personal credit.
It can take time to build up business credit, and you might have to resort to using your personal credit history initially, but you should try to separate business and personal credit as quickly as possible.
As long as you make it a point to isolate your business transactions, you should be ok. Keep good records, and be conscientious, and over time you can keep your business and personal finances from intermixing and causing problems.