As a small business owner, it’s a challenge to keep your personal and business finances separate. But the failure to separate the two creates difficulties for your business, and can even get you into legal trouble. Defining the line between your personal and business finances makes your life significantly easier by saving time and money.

Separation also saves you from getting a headache in the case of an IRS audit. The IRS allows business owners to claim tax deductions on business expenses such as supplies and travel. Yet, all these expenses must be properly recorded for the IRS to verify, which could be difficult without the proper separation of finances.

Luckily, small business owners who haven’t separated their expenses can still do so, by following these 5 tips:

1. Register Your Business

The first step to separate yourself from your business is to officially register your business.

There are multiple business structures to choose from, like Limited Liability Companies and Corporations. Choose carefully when deciding on your business structure, as this affects your ability to raise capital, the amount you pay in taxes and your amount of personal liability. Turning your business into a C corporation, S corporation or LLC gives your business a distinct legal identity of its own and separates you from any other shareholders.

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Incorporation offers the strongest protections to its owners from personal liability, enhances a business’ credibility and gives easier access to capital. However, incorporation also comes at a higher cost than other business structures, including potentially higher taxes, additional administrative duties, and more stringent record keeping.

Make sure to do your research on business structures before registering. The U.S. Small Business Administration offers a guide on launching your business.

2. Obtain an Employer ID Number (EIN)

An EIN is like a social security number but for businesses. Getting an EIN should be a top priority, as it allows you to separate your social security number from your business’ affairs and documentation. It’s a unique nine-digit number assigned by the IRS that identifies your business as an operating entity.

This number allows you to conduct tax-related business and open a bank account for your business. Having an EIN is a useful way to separate your business assets from your personal assets, and it also has the added advantage of preventing identity theft.

Applying for an EIN is both completely free and only takes a matter of minutes. Applications are done on the IRS website.

3. Open a Business Bank Account

An efficient way to separate your personal and business finances is to divide them into separate, designated bank accounts. After you receive an EIN, open a checking and savings account in your business’ name. A number of banks require an EIN to open a business account. Conduct all business transactions through your business accounts.

Business checking accounts allow for transparency in business activities and expenditures. They accommodate better organization of financial records, easier filing of taxes and a way to check your business’ profitability.

4. Get a Business Credit Card

Similar to a separate checking account for your business, a business credit card helps maintain records by clearly defining what is a business expenditure and what isn’t.

A business credit card also enables you to stop mixing personal and business finances on a personal credit card. Placing a large amount of business expenses on your personal credit card is dangerous, since personal credit cards generally have much lower credit limits than business credit cards. Business expenses can easily eat up the majority of, or even max out, your personal credit limit. Maxing out your personal credit cards can cause your credit scores to quickly drop. Also, any problems that occur with your business could end up on your personal credit reports, causing difficulty for you to secure funding for large purchases, such as a home or a car.

Not only do business credit cards help you separate personal and business finances, but they come with a range of additional advantages. They assist in establishing business credit and provide rewards on any business expenses. They also provide benefits such as merchandise discounts. Just like personal credit cards, business credit cards are serious financial tools. Informed and responsible use are vital to fully benefit from their advantages.

6. Use PaySimple for Stress-Free Accounting 

One of the most efficient ways to separate your personal and business financials is through utilizing a reliable accounting software.

Accounting software can help track your business’s income and expenses, monitor your financial transactions, and generate statements. These are all functions your business needs to keep organized and stay up to date.

As an example, accounting software such as QuickBooks Online allows you to easily classify your incoming expenses as personal or business, without unnecessary headache. With our QuickBooks Online integration, all payments collected through PaySimple are processed directly into accounts you’ve set up within your accounting software. This allows for seamless reporting on your business’s finances which will save you hours down the road.

For smaller businesses that are not financially ready for an accounting software, PaySimple makes it easy to classify your business revenue. Within PaySimple, all your transactions are tracked, documented, and ready to view via reports. Every service and payment made to you is recorded and instantly accessible at the click of a button. While it may not function as a complete accounting software, it can still help your business with primary filing duties such as documenting expenses and recording incoming revenue. Overall, having one designated area to review all your transactions is paramount come tax season.

Conclusion

Small business owners of America: it’s not too late to start getting your finances in order. Implementing these tips will take time initially. However, they will bring numerous advantages that will save both you and your business time and money in the long run.

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Oliver Browne

Oliver Browne

With an educational background in Law and Business, Oliver Browne writes about a range of commercial topics including finance, business law, and small business development.

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