Separating business finances is not just a good practice; it’s a crucial step in maintaining financial health. It’s a simple, cost-effective process that can save you from financial pitfalls. Here’s a guide on how to separate Business and personal expenses and finances.
When establishing a business, it’s essential to seek professional advice.
Creating a company that is distinct from yourself can safeguard your finances and assets. Choose a business structure—LLCs, partnerships, and S-corps are the most common for small businesses—and file the necessary paperwork with your state. Remember, you’ll need to handle the required work to file tax returns at each financial year’s end. Once your Business is separate from yours, follow the best practices below to avoid ‘piercing the corporate veil.’
Separate personal and Business bank accounts.
The Business should have a checking account and debit card for business purchases. It would help if you had your EIN to set up a business bank account. Keeping business accounts at the same bank as your checking is often convenient. This makes transfers and distributions easy and sometimes means extra benefits or rewards. This also allows the bank to see your finances in borrowing situations that require a personal guarantee from the owner.
Create separate profiles to receive payments.
Social payment platforms such as Venmo, Paypal, and Zelle are popular ways to pay friends and family, but business payments should run through a separate account. Digital service platforms often have business-specific profiles that keep you compliant with their terms of service. Set up business-specific profiles to accept digital payments or merchant services if you accept credit card payments directly. Accounting software like QuickBooks Online can link all your digital services platforms together to track revenue in one place.
Run all business financial transactions through the business accounts.
Now that your business banking account and avenues to receive payment are established keep those financial transactions separate from your income streams and spending. All business expenses should be paid or reimbursed out of business accounts. All revenue from clients should flow directly into business accounts. Work with your accountant to determine the best way to pay yourself through your Business.
As your Business grows, establish other accounts under your business name.
As the Business grows, it might need other services, such as credit cards, loans, payroll, insurance, and money market accounts. Apply for or run these services using your business name and EIN to avoid piercing the corporate veil.
Accurate tracking and bookkeeping of all business revenues and expenses
are not just good practices; they are essential for many reasons, including preparing accurate business financial statements and tax calculations. If you need help, experts can support you and answer your questions through QuickBooks Live Expert Assisted. You can also consider taking low-cost courses to enhance your bookkeeping skills.
A professional reputation
Customers and clients don’t usually feel confident dealing with a hobby-type business, and that’s how any business can look if there isn’t a proper separation between the Business and its owner.
It would help if you wanted your business to look as professional as possible when you’re in business. Combining Business and personal finances won’t help your cause. For example, though it may work for you, a client may be uncomfortable writing a check to you personally rather than your Business.