How To Separate Business From Personal Finances
Money management and finances are the most important and yet difficult tasks that a small business owner must face. In the early days of your business, one may have a very uneven income stream, having to use our personal funds for startup expenses and in most cases operating at a loss. As your business starts to grow, this business may become your primary source of personal income. Especially if you work alone or have only a few employees, it is easy for your business finances and personal finances to become intertwined. However, for many different reasons, it is extremely important that the two remain completely separate and distinct from each other. Here is a how to guide to separating your finances.
Why Should I Separate My Finances?
The most important reason for separating your business and personal finances is for tax purposes. You may be entitled to certain deductions for your business, such as expenses for your home office and a mileage allowance for your vehicle. Many of these deductions are not available to individual taxpayers, only to businesses. Likewise, you may be responsible for paying certain taxes on your business that do not apply to your personal income. Separating your finances is the only way to ensure that you properly follow all tax laws and receive all advantages to which you are entitled to by law.
Another important reason for separating your finances is the development of a paper trail. If you need to obtain money for the business through grants or loans, you will be expected to show certain financial reports that demonstrate the business’ performance. If your finances are separated it will be much easier to determine which income and expenses belong to the business itself and at the same time easier to get grants and or loans.
By separating your finances it will be easier for you to decide how best to grow and develop the business as well. You will be able to see the areas in which the business excels as well as those areas in which it needs some extra help. You can generate targeted, accurate reports and financial statements that show at a glance how the business performs in various areas.
How Can I Separate My Finances?
The easiest way to separate your business and personal finances is to open a business bank account. If you use credit to make business-related purchases, apply for a credit card in the name of the business. Have all payments made to the business account, and use only those funds and the business credit card to make purchases.
How Do I Get Paid?
You have multiple options for paying yourself. Some business owners find it best to write themselves a set paycheck every week. If you are confident that the business will earn and retain enough funds to pay your salary each time, this will streamline the process and make it easier to accurately pay your personal income taxes.
However, if your business is new or unstable, you may find it better to pass funds through the business account to your personal account. You might decide to retain just enough money in the business account to pay for expenses, and transfer everything that is left into your personal account. This is an ideal solution for those who have many personal expenses but few business expenses and earn wildly different sums on each contract.
Setting Up and Maintaining Bookkeeping and Accounting
Many business owners find themselves confused and overwhelmed by the paperwork that is involved in maintaining separate accounts. Consider hiring outside help. A Virtual Assistant company such as IAC Professionals can set up and maintain your bookkeeping and accounting. Your Virtual Assistant can even handle payroll, writing your paycheck each week and so on. You can maintain as much or as little control over the process as you desire. You can hire the Virtual Assistant for a set number of hours per week or per month, or simply retain his or her services on a per-project basis.