Tips for Small Business Owners to Separate Personal and Business Finances

Tips for Small Business Owners to Separate Personal and Business Finances

For small business entrepreneurs, especially in hospitality and lifestyle businesses, the demarcation between personal finances and business finances gets fuzzy. Although it may appear harmless at initiation, this absence of the distinction can inflict misrule, tax confusion, and growth loss.

It doesn’t matter whether you are running an Airbnb or a boutique café, or whether you are providing mobile wellness services; using a separate set of accounts for your business is crucial for long-term sustainability and prosperity. The use of the reMarkable 2 template is one of the ways through which one can keep track of two accounts and manage them separately.

How to do it and why it’s really important is explained in this comprehensive guide.

• Why the Need for Separating Finances is Critical

Mixing personal and business finances can become a logistical and legal nightmare really quickly. On a financial health level, clear markers enable business owners to keep track of incoming cash, analysis of profitability, and decision making.

In law, it protects individuals’ assets if the business finds itself in debt or lawsuits. For instance, in the instance that your enterprise is an LLC or a corporation, then indulging in mixing your business accounts with your personal accounts may lead to what is known as “piercing the corporate veil”; a defeat that removes the legal barriers of your organization's setup.

In addition, as far as taxes are concerned, it makes deductions easy and lessens the level of expensive errors/auditing done by the IRS or the local authority.

• Start With a Separate Bank Account

Opening a separate business bank account is one of the first and most important steps. This marks a definite boundary in a transaction. All the income, the expenses, the payments to the vendors, and the operational purchases should be made through this account.

Besides making financial tracking more efficient, it also makes the tax season much less stressful. It is much easier to distinguish between the deductible expenses and prepare for their quarterly or yearly filings when your financial records are in order and centralized.

• Opt for Applying a Business Credit Card

Some may find it convenient to use a personal credit card for business, but it can muddle the accounting of your business and add to your credit utilization ratio. A business credit card enables one to develop a credit history for the business, as well as gaining access to such amenities associated with credit cards, like cashback on business transactions, traveling rewards, or expense tools.

Many providers provide integrations with bookkeeping software, which is another nice addition for small business owners who want to keep things organized when they are on the go.

• Get a Payment System for Yourself

A very common error that entrepreneurs commit is the way they treat their business account, as if it were a personal wallet. Rather, decide on an even salary or draw from your business income. The Google Sheets budget template is one of the trackers that can keep the funds separated.

Either in the form of a fixed monthly payment or a percentage of profits, this method assists you to budget your spending and instill discipline in the flow of business money.