Separating business and personal finances should be a top priority for every small and midsized business owner. This is especially true if you run your business out of your home or have just a few employees. When the line between these areas gets blurred, you can encounter tax and legal complications that may threaten your livelihood.
"Put simply, if your business is on the hook for any sum of money and the courts cannot find sufficient distance between your personal and professional finances, they may find you personally responsible for the debt and seize your assets to satisfy your creditors," according to Bench.
The following are five tips for separating business and personal finances to avoid costly errors:
1. Establish a Separate Checking Account
With a checking account devoted exclusively to your business, you'll have a much easier time attending to taxes when the time comes. Your bank statements will also be simpler and easier to review.
2. Determine What Counts as a Business Expense and What Doesn't
When small-business owners fail to separate business and personal finances, they often run into confusion over expenses relating to food, travel and entertainment. Everyone looks for tax deductions wherever possible, but trying to expense a dinner out with your best friend from high school won't fool the Internal Revenue Service.
3. Obtain a Credit Card Strictly for Your Business
Having a credit card exclusively for your business helps you simplify your finances, build a credit history separate from your personal credit history and be eligible to deduct the costs of the card as a business expense (annual fee and interest). Never make the mistake of using a personal credit card to pay for business expenses. Regardless of the size of your enterprise, establishing business credit is essential to its long-range survival.
4. Store Business Receipts Separately
Whether you keep your business receipts in a shoebox (the old-school approach) or online, be rigorous in separating them from receipts you accumulate in your non-professional life. By keeping them organized, you can help avoid trouble if a tax auditor needs to look at your business receipts.
5. Make a Clear-Cut Distinction Between Your Home and Your Office
If you operate your business out of your home, be careful about what you claim as a home office deduction and what belongs in the personal finances category. You can't get away with claiming utilities for your entire house as a business expense, which may be tempting if no clear-cut distinction exists. When in doubt, be sure to check with your legal or tax advisor.
Whether you have 25 employees or operate a single-person business, setting up a budget that is separate from your personal finances can help set clear boundaries and may help protect your personal assets should your business run into financial difficulties.
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