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As an individual and a business owner, you have two distinct financial responsibilities in your life. As an individual, you must manage your personal finances and affairs, including the welfare of your family.
In contrast, as a business owner, you have responsibilities to your company and any employees. You need to give your business finances your attention so you can meet your obligations.
From a business finance point of view, it might seem easier to lump all of your financial responsibilities together under one umbrella. This may seem especially true if your business is a sole proprietorship. However, for reasons discussed below, it is more efficient to separate your personal and business affairs.
Let the information below serve as a guide to help you understand the importance of separating your affairs and the best ways to do so.
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As a sole proprietor, you don’t have to maintain separate records of your personal and business finances. However, keeping separate records can benefit you in the long run.
First, the co-mingling of all your finances could cause you to lose sight of how your business is performing. That does not help you make good and efficient business decisions. Also, it serves you best as a business owner to know which of your assets belong to the business and which belong to you as an individual.
In the case that you may one day wish to incorporate or bring in a partner, knowing what assets belong to your business will help inform the decisions you make. Changing business formats will be much easier if you have clear and separate records.
Business Finances and the IRS
Second, you will encounter reporting obligations to the IRS. It is important to remember that many of your business expenses could qualify as tax deductions. Very few of your personal expenses will qualify. It’s incumbent on you to make sure you have accurate business records to support what you report on your tax return.
Co-mingling your financial records makes it infinitely more difficult for you to accurately report and prove deductions. Were you to be audited, separate financial recordkeeping can ease the process.
As you contemplate how to manage your personal and business finances separately, there are two things you need to address. First, identify which of your past financial records are personal and which are business. Hopefully, you have retained receipts and records to make this task as easy as possible.
Second, establish processes for managing your financial records moving forward. In that regard, consider the following:
Use a Different Business Name
First and foremost, give your business a name that distinguishes it from your personal life. This allows you to direct bills and payments to your business instead of to you personally. For example, a business name allows you to request utility bills for your business facility to be remitted to the business name. When paid, such bills become tax deductions. Even if you want the business to bear your name, differentiating your business name in some way will help you keep things separated.
While you may operate your business as an individual, a separate bank account for your business can work to your advantage. Make sure to pay your business expenses from a dedicated account. This helps you accumulate separate records and provide separate reporting for the IRS or other outside parties.
Challenges in Your Finances
In the case of an emergency in your personal life, you may be tempted to utilize your business funds to alleviate the crisis. However, resist borrowing from your business for personal expenses.
Use your own money for unexpected personal emergencies. If you don’t have enough personal wealth to meet the demand, consider something like a personal loan with no credit minimums or low minimums required.
It’s always better to keep personal and business finances set apart, even when personal emergencies arise. This prevents misunderstandings and potential misuse of business funds.
It’s Best to Separate Your Business and Personal Finances
There are clear advantages to handling your personal and business finances separately. It may take a little time for you to get things set up properly. However, once you have completed the process, your financial life will be much easier to manage.