As the owner of a small business, separating your business life from your personal life is a must. One way that this can be done is to draw a bold line between one’s personal finances and business finances. 1800Accountant offers these tips on strategies to distinguish these two separate responsibilities:
1. Use a formal business structure
A key ingredient to helping you draw the line between personal and business activities is to
set up a formal legal structure for your company. For instance, move from a more informal structure like a sole proprietorship or partnership to a more formal setup
like a corporation or an LLC. By having a formal entity in place, you can easily distinguish between your personal and business finances, including your taxes. A formal business structure can also provide an added layer of protection to ensure your personal assets are set apart from your business assets. This is highly recommended to protect a company from creditors and potential litigation against a small business.
2. Use a business bank account
Certain types of small businesses don’t always require the need for a separate business bank account, but having one is a big advantage. You can clearly separate the profits, losses, and deductions of a business by funneling all of its financial activities into a
business bank account. You also won’t have to worry about mixing up dollars and cents within your personal bank account. Since starting a brand new company is almost like having a baby, giving it the proper treatment and separation is essential.
3. Separate your personal and business tax obligations
Arranging a formal business structure and having a business bank account in place are essentially precursors to adopting a separate tax structure for your company compared to your personal taxes. Keep in mind that business taxes involve unique obligations and deductions that are very different to what’s involved with the traditional April 15th deadline for individual taxpayers. If you do your taxes personally or have an accounting firm assist you, be sure you’re aware of the different tax returns that must be filed with the IRS. One way to do this is to maintain two separate paper folders and digital files in which you store all relevant documents and receipts for easy access. Just be sure that this information is properly stored and safe from hazards.
4. Separate your personal and business activities
Maintaining a clear distinction between your personal and business financial matters is vital, and Michigan’s Virtual CFO understands the significance of this balance. Allocating dedicated time to address each aspect separately can ensure clarity and handling of financial information. By designating distinct periods for personal and business financial activities, such as managing dollar amounts, deductions, and other financial details, you safeguard against potential misunderstandings. Mixing up personal and business finances can lead to inaccurate assessments of your financial situation. It’s essential to avoid making assumptions about financial changes and misattributing them to your business or personal matters. This proactive approach ensures accurate financial management and prevents any potential misinterpretations.
