How to keep your business and personal finances separate

 

When first starting out, many people use their own funds to launch their businesses. If you've gone this route, you'll want to separate your personal and small business finances, because keeping them together can lead to headaches down the road. In this article, we'll explore five of the most effective ways to create clear distinctions between your business and personal finances.

 

Opening a business bank account

One of the biggest benefits of separating your business and personal finances is how it affects your mindset. By compartmentalizing, you can more clearly see business finances and your personal money as two distinct buckets rather than a pooled source of funding. This allows you to manage the financial health of your business more effectively.

Opening a business bank account gives you one centralized place for your business transactions, including expenses, income and overall cash flow. You can then easily monitor these aspects of your business operations and quickly identify business transactions when filing tax returns.

Though they're similar, the main difference between a business and personal bank account is how they're used. Having a business bank account gives your business more capabilities and sets your business up to grow in a way that has more protections.

Think of a business banking account as a valuable tool that helps you simplify key financial tasks. For example, it allows your business to accept debit and credit card payments, a move that can help you reach more customers. Should your growth include hiring employees, a business bank account will set you up for making employee payments and allowing others to perform financial tasks on behalf of your business. By adding employees to your business' accounts (with limits that keep you in control), you can delegate financial tasks, such as making deposits and paying bills, without putting your personal account at risk.

Having separate business and personal bank accounts also helps better protect your personal assets should your business ever face a legal claim, as you have a clearer distinction between the two types of assets.

 

Acquiring a business credit card

Just as having separate personal and business bank accounts empowers your business and offers you greater protection, the same is true for business credit cards.

Opening a business credit card helps you establish and build business credit that's separate from your personal credit. A strong business credit score can help you access the capital you need to cover operating expenses and maintain good cash flow.

Business credit cards can also help you grow in other ways. Having good business credit can help you establish credibility with vendors. Using a business credit card as part of your working capital also comes with a perk: You can earn rewards that you can use to reinvest in your business.

Additionally, keeping your personal credit separate from your business credit adds another layer of protection, reducing the risks to your personal assets and credit score.

 

Incorporating your business

Consider putting your business' name on its corresponding finances, including credit cards and checks. This can add a level of seriousness and professionalism that your customers and vendors are likely to appreciate. To do this, you first have to incorporate your business.

Business structures can be complex, and incorporation is no exception. At its most basic level, incorporating your business means legally separating it from you as its owner. This is different from sole proprietorship, which recognizes your business and you as the same entity (you may be liable, and your personal assets may be at risk, if anything goes wrong). Because of this difference, incorporating your business creates separation that acts as a layer of protection.

When should you incorporate? There are different factors to consider. Some of your options for raising capital, including business loans and working with venture capitalists, may require incorporation and filing as a corporation also comes with tax advantages.

To incorporate your business, you'll need to complete a few minimum requirements. These include registering in the state where you do business and, depending on the industry, with local and federal agencies as well. You'll also need to name a registered agent, file articles of incorporation, write corporate bylaws and establish a board of directors.

 

Funding your business

At any point in the life of your business, you may need to raise capital. Perhaps you'll want to expand operations, reach a new market or invest in research and development. Some business owners turn to friends and family for a loan while others choose to use personal savings or equity financing.

While using a home equity line of credit is an option, it's important to approach this tool thoughtfully. With your house as collateral for a loan, you're muddying the waters between your personal and business finances in a way that may affect your decision-making.

Small business loans are a common way to fund your business while also keeping your personal and business finances separate. However, if you don’t qualify for a loan, there are other ways to fund your business, like grant programs, venture capital or investors. While grants don’t require that you pay any money back, venture capitalists and investors are likely to have specific expectations for the return on their investment. They may require you to relinquish some ownership of your company — and potentially some control.

 

Paying yourself

Once you’ve decided to separate your small business and personal finances, the next step is an important yet an often overlooked one: Pay yourself.

Surprisingly, many first-time business owners tend to forgo this step, opting instead to invest revenue back into the business. But this tactic could actually end up hindering your business’s growth.

Deciding early to pay yourself a salary can help you plan for your business’s growth later on. Adding yourself to the payroll gives you a steady income and can help reduce some of the stress of owning a business. That added financial security helps you avoid operating from a mindset of scarcity. Tax filing may also be easier, because you can differentiate between your business finances and your own.

 

Take the first steps today

Set your business up for growth by separating your business and personal finances. Connect with a business banker today to learn more about how to secure a loan or open a business bank account.