A lot goes into owning and operating a small business. It’s for those who dream, yes, but it’s not for the faint of heart. Among the many necessary business functions are the production of goods or services, marketing, sales, human resources, and accounting. Each of these has a connection to finances and there are two key truths about finances. First, you can’t be casual with finances. And second, personal and business finances, like oil and water, don’t mix well. To save stress and manage finances well, separate finances is unquestionably the right way to go.
Why It’s Important to Separate Finances
Here are some reasons to separate finances:
- Simplifies tax filing. Keeping separate financial records prevents confusion and mistakes when it comes to the crucial annual event called “tax time” and both personal and business taxes need to be filed.
- Simplifies the process of an IRS audit if that takes place.
- Enables the business to take advantage of business tax deductions.
- Helps manage the cash flow of the business by having a clear and uncomplicated understanding of payables, receivables and available cash.
- Helps establish and maintain a reliable business relationship with banks and financial institutions. Business financial records also assist with credit options, insurance, payroll, and merchant services. And, building a strong business credit profile is also very important.
- Shows an established level of business professionalism.
- Safeguards personal security and protects personal liability from lawsuits and creditor claims.
11 Ways to Separate Finances
- Establish a separate legal entity for the business, including such structures as an LLC, S-Corp or C-Corp. A qualified accounting or legal service can provide great assistance in this process.
- Get a business credit card so that personal accounts are not used for business transactions.
- Open a business checking account.
- Put all utility and other expense accounts in the name of the business.
- Pay yourself a salary from the business checking account (as soon as you can) and deposit those checks in your personal checking account, just like other employees. This will ensure that personal funds are not used for the business.
- Keep all personal and business receipts separate.
- Educate employees and partners so that they know that personal and business expenses are kept separate.
- Make a budget and follow it to keep finances well-disciplined. That way, delving into personal finances doesn’t fall victim to poor planning.
- Maintain separate file storage for the business to further separate finances and keep records distinctly separate.
- Implement a dedicated accounting system.
- Work with a qualified accounting professional to achieve accurate and dependable accounting and tax records.
Mistakes to Avoid When Starting a Business
In addition to the mistake of not having separate finances, don’t make these mistakes:
- Not meeting with an accounting professional in the very early stage of your business to seek ideas and feedback about the best legal structure to use, your business ideas, goals, objectives and even business relationships.
- Not creating a formal business plan.
- Not researching and understanding the competition.
- Not making sure that the business has enough money.
- Not investing in marketing.
- Trying to do everything yourself.
Seek Expert Accounting and Tax Assistance
Contact Orcutt and Company, based out of Milford, Ohio and serving the Greater Ohio area for all your accounting and tax needs. Don’t navigate the complicated new business accounting road alone. Estess CPAs specializes in serving the needs of small businesses with professional accounting, bookkeeping, tax planning, and payroll services.