It does not matter what kind of business you are running. If you have only one account for your personal and business finances, it is necessary to separate them. This does not only clean up your accounting but also allows you to see how well your business is doing.
# Why is it so Important to Separate your Finances?
Any business needs to keep it’s a business and personal finance separate. If you want to know, there are some reasons to separate these two finances. These reasons include such as:
- Mostly your business is taxed separately from your personal finances.
- By separating it, you can easily know the financial performance of your business.
- If your finances are not separated, it can be difficult to audit when both finances are received.
# Why you Should Not Mix Business and Personal Finance
If you want to know why it is not a good idea for you to merge your business and personal funds. Here are some of the major reasons:
- Being a businessman does not feel professional if you keep both the finances together. If you are working with a vendor or customer and you take out your personal checkbook or credit card to pay for business expenses, you are giving them the impression that you are not the business owner.
- Keep in mind that you can be audited by the Internal Revenue Service (IRS). Also, the IRS refuses to give you deductions and damages if your two finances are not separate. If you want the IRS to see your business as legitimate and not a hobby, separate your business and personal finances.
- It is certainly worth noting that while keeping both of your finances together, it does not specify your business deductions and income. If you want to be able to claim expenses as a deduction, first you need to be able to show that these deductions were for business purposes and not for personal purposes. It’s a fact, trying to sort out your personal records on time is a nightmare. To make it easier to claim those deductions, record separate business expenses for your business account.
# 10 Tips How to Separate Your Personal and Business Finances?
First of all, a businessman should avoid making this mistake of keeping personal and business finances together. Here are some tips on how to differentiate your personal and business finances.
1. Obtain an EIN
EIN stands for Employment Identification Number. An EIN is like a social security number but it is for businesses. Obtaining an EIN should be a top priority for every business owner, as it allows you to separate your social security number from your business affairs and documentation. It is a unique nine-digit number designated by the IRS that identifies your business as an operating entity. This number allows you to do all your tax-related business and open a bank account for your business. Having an EIN is a very useful way to separate your business assets from your personal assets. If you want to apply for an EIN, it is completely free and only takes a few minutes. Your application is made on the IRS website.
2. Open a small business bank account
If you want to keep your personal fund and business fund completely separate, then for that you must have two separate bank accounts. One on the personal checking account and the other on the small business checking account. This prepares you for a clean and accurate bookkeeping system, so it will be easier for your accountant when tax time revolves around it.
3. Make your business official
If you want to keep your business and personal finances separate, first you are considering setting up a partnership firm, limited liability company, or a private entity for your business. There are many ways you can get help for this, you can refer to the website of the Ministry of Corporate Affairs or you can sit with your advisors and discuss the subject with them. Such as a company’s Chartered Accountant(CA), lawyer, Certified Public Accountant (CPA), or financial planner can determine which institution is best suited and good for your business. Also with the help of all these, you will be able to know how it will affect your business tax and financial planning. These business entities will also give a new level of liability protection to your personal finances, which can be very useful for your business.
4. Classification of all finances
As a successful and intelligent businessman, keeping separate records of accounts of both types of finance is one of the oldest methods for the personal and business nature of financials. Maintaining two separate books of accounts can indeed be very difficult as well as cumbersome and they are prone to errors. Therefore, proper classification of the heads of accounts is necessary to keep personal and business expenses and income separate.
5. Keep your Expenses Separate
No matter how you arrange things, you need to keep your professional and personal expenses completely separate. It includes expenses like entertainment, food, and travel, etc. Attempting to write as much as possible as tax deductions and keeping them separate is tempting, but the simple fact is that dinner with family and friends will not qualify as a business expense. If you are paying for certain services or products that are used for your business as well as your personal needs, then you should take care to open separate expense accounts due to the similarity of expenses.
6. Pay Yourself a Salary
Another tip for keeping both of these personal and business finances separate is to pay yourself as well. Paying yourself a salary in your business is a very good idea. This creates a great connection between your business and personal finance, which also makes you feel like you are working for someone else and from there you get a timely salary. Giving yourself a regular salary will not only improve your chances of succeeding in your business but will also have a good effect on your budget. By paying yourself a salary, you establish that wherever and whenever you need finance for your business, when and how you will withdraw it, and not to use your business money if there is any personal need.
7. Separate Receipts
To differentiate between your personal and business finances, separate your business receipts from personal receivables. When it comes time for you to file taxes, you will have an organized system that will allow you to easily access documents from both your personal and business finances without confusing them.
8. Keep an eye on when you use personal items for business purposes
Often everyone wants us to drive a company car. But for most small business owners, the car that takes you to the gym in the morning takes you to another state to attend a big marketing conference. This not only applies to cars, but also to your mobile phone and many other items that you regularly use for both personal and business purposes. Any expense that you can legally write off when tax time comes, you should write it off to save money. Your tax advisor can help you find out what is deductible, what is not and how to keep a correct record. For this, it is very important to keep an eye on the items that are useful in your business objectives.
9. Set a budget for the business
Being armed with a business credit card and a business bank account is a great start for your business. But with this, setting a budget is another good step that can help you a lot in keeping things under control. It is not that setting a budget for your business does much in terms of separating personal and business finances. But it is also true that budgeting for your business can prevent you from going into personal finance due to poor planning. This can be an emergency, and even the most well-planned budget may not always work as expected. However, creating a clear budget reduces the risk of running into avoidable costs that may force you to turn to your personal finances for rescue.
10. Get a business credit card
You may know that a business credit card will help you create a credit history for your business, different from your personal credit history. The most important thing for you is that your credit card is one of the most likely places for your finances to deteriorate. A separate credit card means that even if your business is within reach of the current budget, you should keep in mind that you will not be tempted to use your personal credit card.
Business is not easy, especially if you are navigating trade finance and taxes for the first time. You may find the task of separating your business and personal finances heavy and impossible, but it is necessary for the long run. By doing this, you are setting up your business for tax benefits and even higher profit margins. You keep these two finances separate while minimizing the potential risk to your personal assets. Once you go through this process, you move one step closer to realizing your dreams of owning a successful business.
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