Keeping Business and Personal Finances Separate

If you do nothing more – Do this one thing that will protect your business and yourself... keep your business and personal finances separate!

Did you form a LLC or an S-Corp? Then you are required to keep these separate in order for your new entity to protect you and your assets.  You cannot be at the grocery store and use your business debit card for groceries or when you go to the doctors office, consider your visit your health insurance. These are both examples of personal expenses.

In theory, we get this is pretty simple and a no brainer, but most new business owners make this mistake.  Let us tell you how to easy it is to avoid:

1. Set up a business checking account.

2. Transfer money from your personal funds into the new business account to get started.  It's perfectly normal that a new business is cash poor, so deposit a lump sum to get you started.  If you cannot afford a lump sum, then periodically move money into the business account.  The key here is, do not move money in and out.  That makes it look like the business account is your personal piggy bank.

3. If you need to pay yourself, then write yourself a check or transfer the money into your personal account.  If you are a S-Corp then talk to your accountant about how best to take distributions and/or a payroll.

What if you are using a credit card?  Can you use your personal credit card for business expenses?

• Yes you can, but here is the caveat – it should have a zero balance before you start placing business items on the credit card. Keep it separate from your personal funds.

• New businesses have a hard time getting qualified for a business credit card and so it is common to use a personal credit card until the business builds up some credit. 

• Can you have more than 1 credit card?  Of course, you can but the same rules apply.

Let’s talk about some expenses that as a new business owner you have and aren’t sure if they are paid out of the business or personal account.

1. Health Insurance – If you have a health insurance policy that you purchase, we would pay for this out of the business.  The policy for you and your family does not have to be in the business’ name to pay from your business checking.

2. Cell Phone – If you are the only one on the plan, then yes, pay for it out of your business account.  Again, the plan can be in your personal name or the business to take the deduction.  If you have a family plan then we would just keep paying it from your personal account.  Your accountant should make the adjustment when preparing your return.

3. Internet – If you have a home office, you are eligible to deduct your business share of internet services but we would continue to pay out of your personal checking account.  So often, we have cable included in our internet service or other family members also using the internet service.

4. Gas – You can only take gas expense if the vehicle is in the business’s name and we do not recommend placing a vehicle in a new business unless it is a specialty vehicle.  For example: electrical truck.  Be sure to track your mileage and take the milage expense at the end of the year.  Once you have a few years in the business, have that conversation with your accountant.

Keeping business and personal funds separate are imperative to protecting yourself, but there is a huge benefit to doing so.  It makes your life so much easier because you now have all of your business income and expenses in one place. 

Wearing all of the hats as a new business owner is a lot to manage and funds are usually still low, so you cannot afford a bookkeeper nor do you have the time to mess with accounting software.  You will get behind in tracking your expenses and this makes it easier to get caught back up, because let’s face it, when you get behind and are looking at a pile of receipts – taking the step to clean it up is overwhelming. 

As always if you have any questions, we are here to help guide you.  Please send them to michelle@acctable.com or Contact Us!