It’s a common mistake for first-time business owners. They assume because they’re just getting started and their business is small, separating personal and business finances isn’t really necessary. Not separating the two can lead to financial complications and confusion. Here are the primary reasons separating personal and business finances is important.
No one wants a visit from the IRS but, if it should happen, you want it to go as smoothly as possible. Separating personal and business finances will make the audit process less painful. Clearly differentiating between the two will make it easier for your accountant. It may also help you avoid an audit in the first place.
With no clear division of your personal and business finances, your personal assets could be at risk. Should someone file a lawsuit against your business, you could find yourself personally liable for any damages. Separating personal and business finances can also offer protection if you fall behind on business debts or your business fails. Vendors looking to get paid may take legal action. If your personal and business finances are commingled, unpaid debt or bankruptcy will put your personal assets and finances at risk.
Credit and Lending Implications
It’s important for a business to be able to establish lines of credit with vendors or be able to obtain a loan if necessary. Not separating personal and business finances can make this difficult if not impossible. If both are mingled together, it will be hard for a lender to evaluate your cash flow, revenue, and other pertinent factors to make a determination. In most cases, this will cause a vendor or lender to pass on providing the credit or funding you need.
Separating Personal and Business Finances
Now that you realize how important it is, you may be wondering about the best way to separate your personal and business finances. Here are steps you can take to divide them and avoid any confusion or complications.
Apply for an EIN
An EIN (Employer Identification Number) is kind of like a social security number for your business. Once you apply, the IRS will issue the nine-digit number to be used for filing your business and payroll taxes. It will also be beneficial when completing some of the other steps necessary when separating personal and business finances.
Set Up A Business Entity
Now that you have an EIN, you can move forward with establishing a business entity. Some small business owners prefer to be a sole proprietorship. However, establishing your business as an LLC (limited liability company) or a corporation will clearly identify your business as a separate entity. This will enable you to file separate personal and business tax returns and help to protect your personal assets.
Get a Business Bank Account and Credit Card
Another important step in separating your personal and business finances is to open a separate bank account for each. You should also get a business credit card. Both of these will provide a clear paper trail of business income and expenditures. It will allow your business to establish credit and be helpful when applying for any type of business funding.
Collect a Salary
It’s important to establish a regular schedule for paying yourself, just as if you were working for someone else. Just randomly pulling money out of your business bank account whenever you need it can blur the line between personal and business finances.
File Receipts Separately
It’s important to keep your personal and business receipts separate. Not only will this make bookkeeping easier but in the case of an audit, you want there to be no confusion between personal and business finances.
Applying for Alternative Financing with CapFlow Funding Group.
Although applying for alternative business financing is much easier than applying for a typical bank loan, separating personal and business finances will help ensure the process moves along quickly and efficiently.
If your business needs an immediate, short-term influx of capital to keep your business moving forward, CapFlow Funding Group may be able to help. Our team of professionals will evaluate your unique situation and help you determine which funding option would best suit your company’s needs. We service many different industries with a variety of different funding needs. In addition to invoice factoring and merchant cash advances, we work with trusted partners to provide additional merchant funding options. Contact us today!