It’s not just because of the fact that keeping personal finances out of your business helps you to truly understand your business’s financial health, but it is also required for tax purposes. Proper bookkeeping can help you maintain records allowing you to keep all your personal and business expenses separate at all times. We all know that as you are getting started in business the lines are blurred between the two as many entrepreneurs finance the start-up through personal savings, but it is important to use the following bookkeeping methods and tips to help keep them separate:
1. Set-up a Business Account
The simplest way to keep expenses for the business separate from your personal expenses is to set up a business checking and savings account that will be used only for business expenses and also serve to make business deposits. If and when the entrepreneur has to make a loan to the business from his/or her personal savings, a bookkeeping entry can be made accounting for the incoming money as a loan to the business and not to be confused with taxable income. Having a separate account will not only be a great tool in helping track expenses for bookkeeping purposes, but will also serve as a way to track loans the entrepreneur has made to the business over periods of time. Most banks here in Jacksonville, FL can open an account for you simply by looking up your business entity on www.sunbiz.org and as long as you are listed as an officer of the business, they will allow you to open the account in the business name. If you need help getting an business set-up or need an EIN number for opening a checking account, please email us at firstname.lastname@example.org today and we can help you get set-up and ready today!
2. Set-up a Business Credit Card
A business credit card is a great way to help build business credit as well as keep business expenses separate from personal expenses as long as the card is only used for business purposes. Another significant benefit of a business credit card is the credit limits tend to be a little higher than personal credit limits, the card balance does not take up room on your debit-to-income ration on your personal credit report, and you will have the ability to earn rewards for your business.
3. Separate Files for Receipts
As many of you know, receipts are important to hold on too just in case a tax auditor needs to review them. It is very important that the receipts for business and personal are kept separate so that receipts match up to what are in the business bookkeeping records for tax time. To help maintain separate files, make sure to label the files as either personal or business and keep them in different areas so that they do not get mistakenly mixed up.
4.Put Yourself on Salary
Surprisingly the number one issue that entrepreneurs have causing them to use a business card for personal expenses is that they are not on salary themselves and feel justified by buying something on the business, justifying it by thinking “well I haven’t taken a salary.” However if you take money out of the business, and it is not a distribution or a repayment of a loan you have given the business (which must have proper documentation and bookkeeping) then it has to go through payroll and have payroll taxes taken out. As side from the legal standpoint, which is plenty of reason to put yourself on salary, another great benefit is the entrepreneur will be able to budget his/her personal expenses based on the salary from the business.
Speaking of budgets, having budgets for both personal and business expenses can help tremendously with keeping personal and business expenses separate. If you are like most entrepreneurs, as soon as the business bank account gets low, you start funding the business with personal money or buying business items with personal money. A budget can help tighten spending and allow the business to take care of its own expenses allowing the separation of personal and business. A business budget is extremely important and so is a personal budget, if you need help with either of these we would be happy to help you set up a budget in you bookkeeping system today!
The end of the year is hard enough with getting ready for taxes for your business and personal, don’t make it harder then it needs to be…make sure that you are taking steps now to separate your personal and business expenses as well as using proper bookkeeping on a daily, weekly, and monthly basis!