How to Separate your Personal and Business Finances

It makes no difference what kind of firm you operate. If you have combined your personal and business funds into a single account, it is essential to separate them. This not only simplifies your bookkeeping but also enables you to monitor the health of your business.

Why is it essential to keep your finances separate?

Any business must maintain a separation between business and personal finances. If you're curious, there are many reasons to keep these two funds separate. Among such causes are the following:

Generally, your business and personal funds are taxed separately.
By separating them, you can readily determine your business's financial success.
If you do not keep your money separate, it may be tough to inspect when both financial statements are received.

Why Should You Not Mix Business and Personal Funds?

It does not seem professional. When interacting with a vendor or customer and using your personal cheque book or credit card to pay for company expenses, you create the impression that you are not a legitimate business owner.

Bear in mind that the Internal Revenue Service may inspect you. Separate your business and personal finances if you want the IRS to see your company as genuine and not a hobby.
Your business expenses and earnings are not clearly labelled. To claim expenditures as deductions, you must be able to demonstrate that they were for business reasons. It's a pain trying to sift through your personal records during tax season. Capture business expenditures in a business account to allow claiming deductions simpler.
The IRS may audit you. As previously stated, the IRS is more likely to examine your company and reject deductions and business losses if your business and personal expenditures are not segregated. If you run a home-based firm, the IRS may not allow you to deduct home business costs if they are not distinct from personal expenses.

10 Easy Tips to separate your personal and business finances

Not to panic if you haven't yet segregated your personal and business documents; it is not too late to start.

1. Obtain an Employer ID Number

This is arguably the easiest method of separating personal and business expenditures. You may get an EIN in a matter of minutes by visiting the IRS website. You may then utilise the EIN as your formal business identification number.

This is also not a question of convenience. EIN is among the greatest methods to safeguard your identity. This is because you'll be using your EIN for business rather than revealing your SSN(Social Security number).

2. Open a Business Account

Banks are best for keeping personal money separate from your small business. You perform all transactions via the business bank account. This will be exclusively for your financial activities.

Additionally, a corporate bank account will assist in preventing unauthorised transactions. It reduces the likelihood that you would spend an excessive amount of money on personal expenditures, leaving your business cash-strapped.

However, the greater benefit can be observed in your business's activities. It will serve as a permanent record of business activity. This will make it much simpler to produce financial statements, submit tax returns, or even just monitor your business's performance.

3. Have a Business Credit Card

Business frequently comes with the requirement to do a significant number of regular transactions. A business credit card will be advantageous. This will be an important financial tool for your business, but it will also be critical in keeping your work and personal activities distinct.

The ideal scenario is to have a "credit card" in your business's name. This would allow you to retain full independence. However, if your business is not yet established enough to deserve a bank-issued credit card, the next best option is to use a credit card only for business reasons.

4. Set a Budget

Along with a business bank account and a business credit card, you're off to a fantastic start. However, in addition to this, creating a budget is an excellent step that may significantly assist you in maintaining things under control.

It is not as if creating a business budget helps in the separation of personal and corporate money. However, preparing a budget for your business may protect you from entering personal finance due to bad preparation.

On the other hand, creating a precise budget mitigates the danger of running into unnecessary expenses, which may require you to dip into your resources for assistance.

5. Officialise your business

You must set up a distinct business entity such as a partnership firm, LLC, or private corporation for your business before you try to keep your personal and business funds separate.

There are many resources available to assist you with this; you may consult the Ministry of Corporate Affairs' website or meet with your consultants to discuss the topic. Doing this can help you to understand your company taxes and financial planning.

6. Make a separate area for your business

Creating a distinct physical space for your small business is one of the greatest methods to maintain your personal finances separate from your small business. The aim is to set up a distinct location for your business to perform to prevent overflow from your private affairs.

7. Organise your Expenses

Whatever arrangement you choose, you must keep your work and personal expenditures totally distinct. It covers expenditures such as amusement, food, and travel, among others.

If you pay for services or goods utilised for both work and personal purposes, you should establish separate expense accounts to account for the similarity of costs.

8. Set a remuneration for yourself

Make it official by writing yourself a monthly check from your business account. Another way to keep your personal and business money distinct is to pay yourself. Giving yourself a salary is an excellent idea.

This establishes a strong link between your company and personal finances, as well as the illusion of working for someone else, from whom you get a timely paycheck.

9. Separate Your Receipts

What better approach to show your dedication to segregating personal and business expenditures than to separate your receipts physically? Consider using traditional folders or creating a new folder in your inbox for digital receipts. This simple habit allows you to sleep better at night, knowing that you are prepared if the IRS ever comes knocking.

10. Consult with an Expert

If you have any doubts about whether you are mistaking an expenditure or are having difficulty keeping your money separate, see a professional. They will almost certainly assist you in developing a plan that helps you separate your finances.

Conclusion

Maintaining a financial separation between your personal and business finances does need additional measures. However, most of those processes only need to be done once, and then you're done. Once you've done so, monitoring your business's revenue and expenditures will become much simpler. And so will tax preparation. It's worthwhile to invest some additional time and attention in establishing that distinction.

Also read:

1) What is a business loan? How to apply for a business loan?
2) Home Loan: Steps to apply, Best Interest Rates on Home Loans & more
3) What is Business Loan? A Complete Guide.
4) How To Get Small Business Loan From Government?

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FAQs

Q. What is a business expense?

Ans. Business expenditures are those that naturally occur as a result of doing business. They are relevant to both small and big businesses.

Q. Why do you need to separate family household finances from business finances?

Ans. Separating your funds is critical since it simplifies income tax calculations and enables you to take advantage of business reporting requirements.

Q. Can I take money out of my business account for personal use?

Ans. Owners of businesses should avoid using their business bank account for personal use. This is a bad practice that may result in further complications, including legal, operational, and tax difficulties. As the business develops, the issues will inevitably increase as well.

Q. How do I pay myself out of my business account?

Ans. A draw is a payment made directly from the business to you and also a salary is processed via the payroll system, and taxes are deducted.