When starting your business, like many entrepreneurs, you more than likely used your personal funds to get it off the ground.
As your business grows and for it to successfully grow, you must establish some boundaries on what is personal and what is business related. This separation will make it easier to keep track of your important records, claim real tax deductions, make educated decisions for growth, and stay compliant with the IRS.
When just starting out it could seem tedious to separate personal and business expenses because the lines are so blurred that everything seems related. If you are unable to see a clear difference between the two, the IRS won't waste time making the decision for your and classifying everything under one umbrella. This could leave you and your family at risk
Here are some tips on how to avoid that potentially disastrous scenario.
Establish a separate legal entity
Keeping your business and personal finances separate, is much easier when the business is its own legal entity. If you have a new business, it’s important that you clearly define which structure you will use to operate, i.e. a sole proprietorship, corporation, LLC, etc.
After you’ve established the business’s legal structure, you can move on to creating an Employer Identification Number or EIN. Also called a taxpayer identification number, this is what the IRS uses to track your business earnings, and it’s the same number you will use to file your business tax return at year’s end. The IRS allows you to apply for an EIN online at no charge.
Open a business checking account
Once you have an EIN for your business the next step is opening separate spending accounts. To open a business bank account as a sole proprietor, you’ll need your EIN and your Social Security number. Partnerships are required to also present a copy of the partnership agreement. For a corporation, you’ll need an EIN and a copy of the articles of incorporation on file with your state business agency. If you’re using a “doing business as” name, you’ll need to provide the bank with a copy of your DBA certificate. The bank will also need a business address and a copy of your business license if one is required in your state.
You more than likely already have a bank that you love working with, so start by talking to them about opening a business checking account.
Implement a dedicated accounting system
Having a separate checking account can help with tracking your business income and expenses, but it’s helpful to have a more comprehensive accounting strategy in place.
Hiring an accountant or bookkeeper allows you to pass the burden of handling your business finances on to someone else, but it does come at a cost. When you’re comparing your accounting options, pay close attention to the fees involved and the range of services the bookkeeper or accountant offers.
If you’re comfortable with a DIY approach, there are a number of tools available for tracking your business income and expenses. QuickBooks, for example, allows you to sync up your bank and credit card accounts for easy expense tracking. You can also use the software to create invoices, accept payments and process payroll.
Use caution when commingling
Blending your business and personal finances can create unnecessary headaches, particularly with regard to your tax filing. If you do have to commingle your finances for any reason, take care to preserve accurate records outlining which expenses fall under the business umbrella. You will spare yourself a future dilemma.