01/29/2024
3 Best Practices to Keep Business and Personal Finances Separate
Keeping your business and personal finances separate is critical for the success of your business.
Here's why:
•Tax compliance - The IRS requires you to report all business income and expenses accurately. Not properly separating expenses can create challenges come tax time. Businesses also rely on this information to make informed business decisions year round.
•Liability protection - Your personal assets are vulnerable if your business is sued or goes bankrupt. Separate accounts protect your personal finances.
•Tracking - When finances are intermingled, you lose visibility into business profits vs. personal income. Separate accounts give you clear financial insight.
So, what can you do? Follow these three best practices:
1. Open a dedicated business checking account and credit card.
Choose a bank that offers accounts for small businesses with features such as higher transaction volumes. Avoid using your personal bank account.
Apply for a business credit card in your company's name and use it solely for company expenses. An added benefit is earned rewards on business spending.
2. Use accounting software to track all income and expenses.
Software like QuickBooks allows you to categorize transactions as business or personal. Use tags such as income, vendor payments, supplies, payroll, etc. as business expenses. Utilize reports in the software to analyze income, profitability, expenses by category, accounts payable/receivable, etc.
3. Pay yourself a consistent, reasonable salary.
Pay yourself a fixed, regular salary from the business account to your personal account. Avoid taking random, undocumented cash withdrawals from business accounts.
Keeping your finances straight may seem tedious, but doing it right from the start saves major headaches down the road.
