As the owner of a small business, separating your business life from your personal life is a must. One way that this can be done is to draw a bold line between one’s personal finances and business finances. 1-800Accountant offers these tips on strategies to distinguish these two separate responsibilities:
1. Use a formal business structure
A key ingredient to helping you draw the line between personal and business activities is to set up a formal legal structure for your company. For instance, move from a more informal structure like a sole proprietorship or partnership to a more formal setup like a corporation or an LLC. By having a formal entity in place, you can easily distinguish between your personal and business finances, including your taxes. A formal business structure can also provide an added layer of protection to ensure your personal assets are set apart from your business assets. This is highly recommended to protect a company from creditors and potential litigation against a small business.
2. Use a business bank account
Certain types of small businesses don’t always require the need for a separate business bank account, but having one is a big advantage. You can clearly separate the profits, losses, and deductions of a business by funneling all of its financial activities into a business bank account. You also won’t have to worry about mixing up dollars and cents within your personal bank account. Since starting a brand new company is almost like having a baby, giving it the proper treatment and separation is essential.
3. Separate your personal and business tax obligations
Arranging a formal business structure and having a business bank account in place are essentially precursors to adopting a separate tax structure for your company compared to your personal taxes. Keep in mind that business taxes involve unique obligations and deductions that are very different to what’s involved with the traditional April 15th deadline for individual taxpayers. If you do your taxes personally or have an accounting firm assist you, be sure you’re aware of the different tax returns that must be filed with the IRS. One way to do this is to maintain two separate paper folders and digital files in which you store all relevant documents and receipts for easy access. Just be sure that this information is properly stored and safe from hazards.
4. Separate your personal and business activities
It may sound obvious to some, but by devoting your time to your personal life and your business life when it’s appropriate, it will help you separate your personal and business finances. For example, set aside time to focus on these two activities at different times so that you aren’t confusing them, particularly when working with specific dollar amounts, deductions, or other financial information. Dollars and cents can be easily confused, so don’t let it happen by keeping your eyes on this information at different times. The last thing you’d want to happen is to notice a significant change in your finances and automatically attribute it to your business, when in fact it may involve your personal finances. This could also work the other way around.
The accountants, CPAs, and enrolled agents at 1-800Accountant can assist you to clearly separate your personal and business finances to help you stay organized and on top of things. Learn how 1-800Accountant can help you by calling 1-888-749-0117 or by visiting www.1-800Accountant.
Image credit: The photograph of money is used with permission via the Creative Commons license through Flickr.