4 Tips to Keep Your Business and Personal Finances Separate
As a business owner, separating business and personal finances is imperative to protect your assets and credit. While it's easy to fall into a pattern where you're mixing the two, there are some important reasons to keep these expenses separate.
The steps to separating your finances are simple. While these four strategies might take some time and effort, you'll be setting yourself up for long-term success with clean books and organized finances to help power growth.
1 Get an EIN
Your first step to separating business and personal finances is to secure an Employer Identification Number, or EIN. An EIN is like a Social Security number for your business. Once you have an EIN, you can open bank accounts and apply for credit cards in your business's name. An EIN also empowers you to register your business with your local Secretary of State's office and keep track of payments like payroll taxes.
You can apply for an EIN online through the IRS website. There's no fee to apply, and you'll be issued an EIN almost immediately. You'll be able to download the confirmation letter and then use your EIN to separate your business and personal finances further.
2 Open business-specific accounts
With an EIN in hand, you can head to the bank and open a business checking account. You can free up your personal cash and keep your business income and expenses running through a single bank account dedicated exclusively to your company.
Not only will you save time parsing your expenses each month and sorting out business from personal, it may also be easier to see where you're spending your money. This can give you better insights on how to streamline expenses to maximize revenues.
You can also open a business credit card once you have an EIN. Separating your personal and company cards can help free up available credit on your personal accounts and help you better track your business expenses. You may also be able to take advantage of rewards programs with benefits like cash back for your business, helping reduce your expenses.
3 Pay yourself
Setting up payroll can help you further separate your business and personal finances. By regularly drawing a paycheck, you can build better habits and take a more hands-off approach.
Running payroll, even if it's only for yourself, also helps with your annual personal tax burden throughout the year instead of leaving your lump-sum income tax payment until filing time. Be sure to speak with your tax specialist for tips on setting up your company payroll and the potential savings. You could even save on self-employment tax, keeping more money in your pocket and your business.
4 Track your expenses
A set of impeccable books is critical for business growth. While tracking expenses can be tedious when you first start, over time, the practice can pay your business serious dividends. After all, it's hard to understand where you can streamline costs if you're not tracking expenses.
When you add simple bookkeeping or accounting software to the mix, you can save even more time each month when the software begins to recognize and auto-categorize your expenses for you.
Tracking expenses helps your business significantly come tax time. By keeping up with your expenses throughout the year, you can run a simple report for your tax professional that lists your expenses in common IRS deduction categories. Your tax pro will thank you, and you'll be well on your way to that impeccable set of books.
Caution pays off
While it might seem like you have to take quite a few steps when separating your business and personal finances, the up-front work will pay off in the long run. Keeping your finances separate can help you not just during tax time, but in the event you need a business loan or happen to be audited. The IRS and banks appreciate both clean books and business owners who draw distinct lines between personal and business spending.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.