Separating business finances from personal finances is unfamiliar to many business owners. This is especially true for first-time business owners. Unfortunately, when there is an imbalance between business and personal finances, business finances are most likely to suffer.
30% of small businesses collapse within the first year due to financial mistakes. Mixing personal and business finances is one common financial mistake that has led to the death of many businesses. So how do you balance your business and personal finances and ensure that both continue flowing without mishaps?
Establish the Business Entity Officially
Consider establishing your entity as a partnership, corporation, or limited liability company. By so doing, your business is a formal separate legal entity from you. Consult your advisors, such as lawyers or financial planners, and get an insight into what entity would make the most sense.
Also, get to understand how this move will affect your financial planning and taxes. Incorporating will enable you to file your tax returns separately from the business tax returns, thus creating a balance.
Get a Separate Business Account and Credit Card
Get a business bank account as soon as your business is set to begin transactions. The typical business accounts are savings, checking, or merchant services accounts. Your personal credit card should also not be used to carry out business transactions.
When you have separate business accounts, you enjoy benefits such as a growing relationship between your business and the bank and added protection during purchases. Additionally, it makes it easier to separate your receipts. Avoid storing personal receipts together with business receipts, making it hard to establish what expenses have gone into what.
Allocate Yourself a Salary
Set aside a percentage of your business profit as your salary. The amount should be withdrawn from the business every month and sent to your personal account. This creates a more formal line between your personal finances and business finances.
By paying yourself, you can better manage your business finances without taking something from the account when the need arises. Also, this will enable you to carry out personal expenses without interfering with the business finances.
Keep Note of the Personal vs. Business Expenses
It should be clear which expenses are personal and which are strictly business-related. Additionally, identify instances when the two expenses intermingle.
For instance, using your personal car to attend a business meeting is a business expense. Note such and other expenses that may be
not be as direct to classify as personal or business expenses and classify them before they arise.
Additionally, if you borrow business money for personal expenses, ensure that you refund this money even if nobody is to follow you up.
Evade the Innumerable Risks of Mixing Business and Personal Finances
Above are the ways you can balance business and personal finances. It is essential to note that it is tricky to acquire legal protection when business and personal finances are muddled. Moreover, bookkeeping is a lot easier when personal and business finances are separated.
Sources: YoungMogul, irs, howtostartanllc, bizmanualz, investopedia, nolo, nolo