There’s one common mistake that most first-time entrepreneurs make and that is failing to keep their business and personal finances separate. This can lead to a mismanagement of funds, tax errors, and it can expose all of your finances in a lawsuit. These tips can help you draw a line between your personal life and your business so those risks can be minimized.
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Open a Business Checking Account
All of your business finances should be managed through a business checking account. The primary reason for doing this is to distinguish your business in the eyes of the IRS. If you manage your business through your personal checking account, they may view your business as a hobby. That means you won’t be eligible for certain tax benefits. Keeping an active business checking account will also make it easier for you to keep accurate records, allowing you to see exactly how much your business is making within each quarter.
Managing Your Personal Life
Keeping your finances separate means restricting the flow of cash in both directions. While it’s important to resist pouring your personal capital into your business, it’s equally important to resist the urge to use your business’ capital to cover expenses in your personal life. You should act as though the business does not belong to you and look for other ways to cover your personal debts. If you do fall behind and need the help, it’s best to consider personal installment loans in Utah and other states where these options are available, rather than taking money out of your business accounts. This helps ensure your personal money problems won’t end up harming your business.
Apply for a Credit Card
While getting approved for a business credit card may be a little more challenging, it will be worth the trouble. It gives you the resources you may need to make emergency repairs or replace equipment without having to dip into your personal savings. Additionally, the interest you’re charged on the account will be tax deductible as a business expense. Finally, this is another way to keep your business records more accurate.
Make Sure You Take a Salary
While it may be tempting to simply take money from your business account as you need it, you’ll be better off paying yourself a modest salary. Try to pay yourself a smaller salary to start, giving yourself modest raises as the business starts to grow. This will ensure you’re not taking too much of the business’ revenue for your personal use. Additionally, issuing your pay from your business checking account will help you keep your finances separate in terms of filing taxes. Just remember to issue yourself a paycheck just as you would in paying any of your other employees.
Document Contributions to the Business
As you start out, you’ll undoubtedly be using your personal money, credit, or property to create your business. While that’s not uncommon, it’s important to document how those contributions are to be considered. Whether the assets are to be used as an investment or a loan from yourself to your business, properly documenting the transaction is essential. Again, how you choose to identify these contributions will determine whether or not they will be tax deductible. If you’re unsure which is the best option, it may be wise to consult your accountant or tax preparer ahead of time.
Making use of these tactics can help you keep your finances separate so you will be able to maintain more accurate records. This will help you remain more secure in your personal life while helping you record the financial data that will help you operate your business more efficiently.
About Carson Derrow
