5 Easy and Helpful Tips for Separating Business and Personal Finances
Mandy Maas, Your Front eOffice
Do you feel overwhelmed about keeping your business and personal finances separate? Things come up and sometimes you find yourself in an unforeseen situation with unexpected expenses. However, there are many easy strategies and solutions to keep your finances separate, without the headache. If you want to plan ahead, check out “Eight Expenses CEOs Might Not Think To Budget For” to gain more insight into some common, but unexpected, expenses you should take into account.
If you are a new business, you’ll want to:
GET AN EIN NUMBER
An Employment Identification Number (EIN) basically a social security number for your business. You will use this number for all your legal and tax documents instead of your personal social security number. By designating your business with an EIN, it will ensure you draw the line between business and personal activities.
GET A BUSINESS CHECKING ACCOUNT AND BUSINESS CREDIT CARD(S)
Opening a business checking account and getting a business credit card are example of business activities where you would want to use your company EIN. Having a defined business-only account and credit card(s) will help you legitimately separate your business and personal affairs without blurring the line.
There are many benefits of having structured business accounts. Using a business credit card will not only help build a credit history for your business, but it will also help give you access to instant, accurate business financials at a glance. You will find out how important it is to keep everything separated come tax time. When it’s time to do your taxes, having a clear breakdown of personal and business activities will ultimately save you time and reduce bookkeeping hours.
After your business’s financial foundation is set up (EIN and business accounts mentioned above), it is up to you to stay diligent about keeping your finances separate.
Here are some clever tips on how you can effortlessly manage your business’s finances, without mixing in personal expenses:
- PAY YOURSELF A SALARY
Providing yourself with a regular paycheck will not only increase your business’s chance of success, it will help your business stay on budget. Paying yourself a salary is a clear way to draw the line between business and personal finances, while creating a paper trail in case your business was ever audited by the Internal Revenue Service (IRS). Write yourself a check each month from your business checking account and transfer/deposit it to your personal checking account.
If you find you are unable to live off the budget you gave yourself in your salaried paycheck, you should revisit your personal budget and if there isn’t room for change, you will want to reevaluate how much you are paying yourself. Adjust your salary to reflect the realistic number you need to stay on budget, instead of paying for a personal expense out of your business account, one at a time.
- CARRY 2 WALLETS
One helpful tip we tell our clients is to carry two wallets! Do you have a personal and business card from the same bank and often get them confused at the register? You don’t need to worry anymore! Get two wallets, and put your business banking account cards in one, and your personal account cards in the other. You’ll never accidentally charge personal items on the business again.
- KEEP RECEIPTS SEPARATE
Just as we recommend keeping your business and personal cards in separate wallets, we recommend keeping your business and personal receipts separate. Keep separate folders in your email for digital receipts, and for printed receipts you can store them in two physically separate locations, whether that be file folders or shoe boxes to you. There are also several Expense Apps to help you digitally record your business expenses, and stay on the ball.
Intuit QuickBooks Online offers one of the most comprehensive business financial management programs, which offers an online photo receipt capture feature. Find out how to upload your receipts and bills to QuickBooks Online here.
- COMMUNICATE WITH YOUR BUSINESS PARTNER(S), EMPLOYEE(S), AND RELEVANT FAMILY
You don’t have to do this alone! Each member of your business should be on the same page financially, while staying committed to the same goals. Be sure to clearly communicate the financial plan and practice you put into place. Having clear boundaries between your business and personal financials will keep your business’s financial goals on task and you will avoid unnecessary problems later on.
If talking to your business partner about money seems dreadful, just remember to keep an open communication. Here are a few tips on how to find common ground to communicate with your partner, while motivating you both to improve the business’s finances and reach your shared goals.
- TALK TO A PRO
If you have concerns you are not classifying an expense correctly, or having a hard time managing and keeping your business and personal finances separate, don’t hesitate to bring in a pro. An accounting professional can help you create a financial workflow that is custom to your business and its financial goals. Not only will this save you time, but long term it can save you money- especially at tax time. If you are unsure about what deductions your business is qualified for, ask your accountant, and/or check out this Deduction Business Expenses guide from the IRS.
If you haven’t separated your finances into personal and business accounts, don’t worry! It’s never too late to start. As a business owner, sometimes it can feel overwhelming trying to keep your personal and business finances separate.
Keeping your personal expenses in check, and out of the business account, will save you time, money, and frustration down the road. Simple, small actions such as having separate banking accounts and credit cards, carrying two wallets, separating your receipts physically and/or digitally, and consulting with an accounting professional will ensure your business maintains clean financials while on a path to financial success.