When venturing into the world of self-employment, many are lured by the prospect of flexible hours, maximum profits, and the benefit of being one’s own boss. While the perks of running one’s own business often outweigh the negatives, it requires diligence and discipline to be successful. Establishing boundaries between your personal and business finances is another best practice you should follow.
By keeping close tabs on where you’re spending your hard-earned money, you will find areas in which you can save, get out of debt, and improve your credit. In addition, by keeping business and personal accounts separate, you will protect yourself in the case of business losses or lawsuits.
Setting Boundaries Between Your Personal & Business Finances
1. Prepare accordingly
Before you do anything, conduct some research on licensing laws in your area to ensure your business will be operating legally. To confirm you have all your bases covered, check with your local municipality and Secretary of State before conducting business.
It’s important to legally establish your business by setting up an LLC, C Corp, or S Corp. While it is possible to do research online in order to determine which is best for you, it’s always best to consult a professional if you are unsure.
Spend a few minutes and apply for Employer Identification Number (EIN) with the IRS. By establishing a separate legal identity for your business, you are protecting your personal assets from business losses, debts, and lawsuits.
2. Open credit and checking accounts for your business
Having a business credit card is important for two reasons. First, it will keep a clear record of your business vs. personal expenses. Second, it will keep you from maxing out your personal account with business expenses. Not only will a maxed-out account make it harder to pay down credit card debt, but it will negatively impact your credit!
Once you’ve opened a business credit card, open a business checking account to keep everything separate and organized. This will ensure that all your business expenditures are in the same place and create a clear record of bank statements to use at tax season.
3. Set up a dedicated space and filing system
The key to running a business efficiently is working from a dedicated space that is conducive to productivity. Just as you’ve separated your business and personal finances, it’s important to create clear zones for living and working, especially if you’re operating your business from home.
Another necessity for every business is a locking filing system. This will keep all business documents separate from personal documents. This will make things run more smoothly during tax season and reduce your risk of legal trouble.
4. Keep a cash reserve
Tax season can be stressful for business owners. It’s best to set aside a portion of your business’ earnings so you can cut a check to the IRS without breaking a sweat. Once you have a good idea of what you can expect to owe in taxes each year, set up a quarterly installment schedule in which you write four checks to the IRS throughout the year. This will reduce the amount you’ll have to pay come April 15.
5. Closely monitor and track expenses
Don’t forget to differentiate between business and personal items when they are purchased at the same time, i.e. buying coffee for work along with personal groceries. While it can be a hassle to use two cards, it will ensure that your financial record is clean, and all of your expenses are separated for your record keeping. By maintaining clear boundaries between your personal and business expenses, you will hold yourself accountable and make sure to not get into too much debt.
Haley Kieser covers financial topics for CarMax and other notable brands. One thing she loves more than writing – saving money!