When you start a new business, you’ll need to keep your business finances and personal finances separate as early on as possible. It can be easy to combine the two by putting your business expenses on a personal credit card or using money in a business account for personal expenses. However, over time, mixing the two can become detrimental, eventually leading to legal issues and impeding your business growth.
Splitting your personal finances and your new business finances will make things easier during tax season, help you keep better tracking of your business expenses, and allow you to start building business-specific credit.
Separating Your Personal and Business Finances
1. Register Your Business as a Separate Identity
Whether you’re an e-commerce website owner or a mom and pop shop, registering your business should be the first step you take. You can choose from a number of different business structures; research which best aligns with your business goals. If you form a corporation, you’ll be able to create a separate credit file under the business name and limit your liability as the business owner.
2. Apply for an EIN
Applying for an Employer Identification Number (EIN) is free through the IRS website and works similarly to your social security number when you file your personal taxes or apply for a credit card. The EIN will be your business’ federal tax identification number and allows you to open business bank accounts and apply for business loans under your company name.
3. Open Business Bank Accounts
Using your EIN, you can open business checking and savings accounts so that you have accounts that are only for your business transactions. This will help you continue to keep your finances separate, allowing you to track business expenses and capital more easily.
4. Track Your Expenses Properly
Bookkeeping will be increasingly important as your new business grows. It’s important to always have a handle on your finances. Bookkeeping software can help you manage all of your business accounts in one place so that you have a better understanding of your profits and losses.
To keep your personal finances on track, consider investing in wealth management services.Skilled professionals can help you manage your investments and plan your financial future on both the personal and business side, helping you maintain the necessary separation while guiding you in the right direction.
5. Open a Business Credit Card
Now that you have business bank accounts, you can open a business credit card in your company’s name (as long as your personal credit fits within preexisting guidelines). While your finances will be separate, you need existing personal credit in order to open a business credit account.
A business credit card allows you to to keep purchases for your business separate. As you may know, personal credit cards typically come with lower credit limits, so a business credit card can help elevate your business to the next level if you need to make expensive purchases to promote the growth of your organization.
At the same time, you wouldn’t want business expenses placed on your personal credit card because they can max out your personal card quickly, making it difficult for you to pay for important personal expenses.
Business credit cards also have advantages that personal cards do not. For example, they allow you to build your business credit score and offer business-related rewards like cash back and insurance benefits.
6. Give Yourself a Salary
Giving yourself a monthly salary can help you refrain from using your business account for personal expenses. If you set up a direct deposit for yourself every month, you can act as though the company is paying you a salary; then, you can budget accordingly based on that amount.
Growing a business is a challenge, especially if you don’t keep your personal finances and business finances separate. Keeping firm boundaries when it comes to these separate types of accounts can help you grow your business and protect your assets.