Avoiding Business Bankruptcy: The Do’s and Don’ts to Merging Business and Personal Finances

 

 

While bigger purchases could play a huge role in blurring the lines, it is often the daily purchases that will really muddle the situation. Business owners are going to want to come up with a plan of action to separate expenses on the spot without overthinking the purchase. A simple way to do this is to make a weekly withdrawal of cash for personal use and then use a business credit or debit card for all business purchases. Whatever the system is, it is important to turn it into a consistent habit that will not be forgotten. 

 

 

Those that own a small business, especially one that is fully or partially run from home, often enjoy the idea of saving on taxes with business expenses. While it is important to speak with a financial advisor about common businesses expenses, overdoing it is a red flag for the IRS. The amount of small business audits is on the rise by as much as 7 percent every year, and no one wants to find themselves in a legal mess at the end of a fiscal year. Attempting to cut corners on taxes with vague business expenses will result in more problems in the long run. 

 

 

Forming a Limited Liability Corporation (LLC) or S Corp is the most comprehensive option for separating personal finances from business finances. An LLC will become a completely separate entity when it comes to both financial and legal issues. Whatever happens to the company will not affect the owner and vice versa. This is also a good option to protect the owner in the event the company is sued. 

 

 

Those that have recently created a business will often find themselves barely scraping, and this can make a salary for the owner seem impractical. When the IRS sees a static amount withdraw from the company account and placed into the owner’s account each month, it will help to reinforce the notion that the two entities are completely separated. It will also serve as a constant reminder to the owner that the finances cannot be intertwined at all.

 

No one wants to find themselves struggling with an audit or rummaging through stacks of receipts at the end of fiscal year. It is important to start these financial accounts off on the right foot to avoid major issues such as bankruptcy in the future.