Numerous challenges come with starting a new business. One way to keep things clean and simple from the start is to separate your business finances and personal finances early on.
It’s easy to mix the two—for example, putting business expenses on your personal credit card, or dipping into money for your business to pay for personal expenses. Over time, this can be detrimental, not only for your business, but your personal life as well. Worse, it could even lead to legal problems.
Why bother splitting your business and personal finances?
First and foremost, splitting your business and personal finances will make things far easier come tax season. Keeping separate bank accounts and credit cards for your business will make it far easier to track and record your business expenses. This qualifies you to receive tax deductions for your business’s expenses and makes things far more straightforward if the IRS audits you.
Secondly, having separate bank accounts and credit cards for your business helps make you look more professional when dealing with merchants and vendors.
Finally, separating your business finances from your personal finance allows you to start building credit specifically for your business. Your business’s credit is separate from your own personal credit scores and reports. It’s a good idea to concentrate on establishing and building your business credit as early as possible, as this will allow you to apply for larger business loans and high-tier business credit cards when your business becomes more established.
1. Register your business as its own separate legal identity
The first step you should take is to register your business.
There are numerous types of business structures to choose from. Research which is best for your overall growth goals, and think seriously about forming a corporation. This will allow you to create a separate credit file under your business’s name and limit the liability of the business owner.
There are several different business structures that incorporate your business (for example C corp, S corp, or limited liability company), so make sure to investigate which structure best suits your business needs.
2. Apply for an Employer Identification Number (EIN)
After registering your business, apply for an Employer Identification Number (EIN) through the IRS website for free. An EIN, also known as a federal tax ID number, operates somewhat like a Social Security number, but for your business as opposed to your person.
An EIN gives you the ability to open business bank accounts and apply for loans and credit cards under your business’s name. An EIN can also be used in place of a Social Security number on business documents, which lessens incidences of Social Security number fraud. For more on how to get your EIN, read this guide.
3. Open business bank accounts
Using your newly-received EIN, open business checking and savings accounts in your business’s name. The idea here is to use these accounts exclusively for business transactions and savings.
This will help you better track your business expenses and capital since they’re managed separately from your personal accounts. This also makes financial record-keeping—not to mention tax time—much easier.
4. Open a business credit card
With your EIN and business name, you can open a business credit card in the name of your company, so long as your personal credit makes the cut.
A business credit card that you use solely for business purchases helps you further separate your finances. It’s unwise to place business expenses on a personal card, not only because it mixes up your personal and business expenses, but because personal credit cards come generally come with lower credit limits.
A large number of business expenses placed on a personal card can easily max out your credit limit, negatively affecting your personal credit scores.
Business credit cards also come with additional advantages, such as allowing you to build your business credit scores, and a range of business-related rewards and benefits like cash back on your most frequent business purchases, extended warranties, and insurance.
5. Set yourself a rigid salary
Setting yourself a monthly salary is vital to the health of your business, as it stops you from dipping into your business account as if it were your personal piggy bank. It’s smart to set up a direct deposit every month from your business account to your personal account. Act as if a company is paying you a salary, and budget accordingly.
Setting up, running, and managing your own business is a monumental challenge and a learning experience. Follow these five steps to help you build a firm boundary between your personal money and your business’s finances.