There are a number of steps involved when it comes to keeping your business and personal finances separate, but these steps are necessary for financial control and organization. It can also help to improve your business on paper, making it easier to grow and become more successful. This process can be confusing and complicated for a first-time business owner because there are a few things that need to be set up before you can effectively separate and organize your finances. Today we will be taking a look at 5 tips to help you keep your business and personal finances separate.
1. Apply For An EIN
An EIN (employee identification number) consists of nine digits. It will be allocated to your firm by the IRS. You need an EIN to fill in the income tax on your business or payroll tax return, to establish your business entity type, to open up a bank account for your business, to apply for a credit card for your business, and more. Once you’ve got your EIN, your social security won’t have to be used for business objectives. This is the first step to keeping your business and personal finances separate.
2. Establish A Business Entity
Once you’ve got your EIN, you will have the option to set up your business type. You can choose to become an LLC or corporation. The main difference between these entities is the way they are taxed and a business owner will need to make sure that they know how to setup an LLC correctly if they choose to do so. Establishing your business as a solitary entity will allow you to keep your business tax returns away from your personal tax returns. It also provides your business with some legal protection.
3. Use Separate Bank Accounts
Using separate bank accounts is one of the most significant things you can do to keep your personal and business finances separate. To do so, you should use your EIN to open a business bank account. Ideally, you should begin with a business checking account, as these are classed as a starting point for a business’s financial footing. With a business bank account, bills can be paid, cash can be deposited, invoice payments can be collected, and equipment can be bought without using your personal account.
4. Get A Credit Card
As soon as you have a business bank account, you should get yourself a business credit card. Putting all your business’s expenses on a personal credit card will just make things confusing. Possessing a business credit card will also allow you to improve your business credit score. This serves a similar function to a personal credit score, but it is assessed on a separate scale. Having a good business credit score will make it easier for your business to expand and open up in more locations.
5. Set Yourself A Salary
Setting yourself a salary and paying this from your business will create an official boundary between your personal and business finances. All you need to do is set up a direct debit or send money to yourself from your business bank account at a set time each month, just like you are being paid for working for someone else. Setting yourself a salary will control the amount of money being taken out of your business finances, instead of pulling money out the business whenever you feel like it.
Gotta Keep Them Separated
No matter what your business may be, keeping your business and personal finances separate is essential for success. There are many reasons why this is important, and once it has been set up, it will make your financial situation as a business owner much easier to handle.
