Small businesses start out for many reasons, but I see a lot of them start from a hobby. Many more start by a need for income, and a few more start because of an opportunity that they can’t pass up. No matter what the reason is for starting your business and no matter the size of your business, there is one big thing everyone should be doing. Keep your business and personal funds separate!! There are a number of reasons why, here’s just a few that will hopefully convince you to stop.
I’m going to start with the one that effects me the most, and that’s keeping things clean. When you use your personal account to pay for business expenses it takes a lot of extra time to track that in an accounting system in a way that is clean and accurate. I’ve seen many people make a list of the total amount they spent on things like phone bills or general supplies for the year. There’s no breakdown of specific amounts, and sometimes no record of who the expenses were paid to. Although it may be an accurate amount, it is not clean, which leads to my next reason.
When it comes to government audits it seems to be that you are guilty until proven innocent. It is up to you to prove that every expense was an actual business expense that you are allowed to deduct. If you do not have receipts or some kind of proof for every expense, they may not be considered tax deductible. That will bring your taxable income up and could produce some hefty fines and fees. If you are paying all business expenses with business bank accounts, credit cards, or loans, than it is a lot easier to prove the expense.
Keeping Your Business Separate
Most businesses I deal with now are LLCs. They decided to become an LLC to make sure that their businesses is separate from them legally. However, many of these people still use their business account to pay personal fund and pay business expenses from personal accounts. This could make it hard to prove that you are in fact an LLC if there was ever a question.
What to do?
First of all, it’s never too late to start new! So how do you change your ways? The first step is to make sure you have a dedicated bank account for your business. This should be the account that all income goes into, do not have business income deposited into personal accounts. This should also be the account that all of your expenses are paid from. If for whatever reason you need to have a credit card to pay expenses either make sure it is a business credit card, or if it’s a personal card make sure it is only used for business expenses and then paid for by the business. The next step is to figure out a system to pay yourself so you are not paying for personal expenses from your business account. For many people it is easiest to have a personal bank account with the same bank as your business account. Then you can transfer money when you need to pay yourself. Try to set up a set amount you are going to pay yourself every month, every other week, or even weekly. This is considered an owner’s draw and is exactly how sole props and partner’s pay themselves. Lastly, if money is tight in your business and there is not enough to pay the bills, don’t pay for them from your personal account. Deposit an amount that will cover your bills from your personal money, this is considered an owner’s investment and is the clean way to help pay businesses expenses with personal fund.