How to Separate Personal and Business Finances
As someone just starting a business, it can be easy to slip into using your personal accounts to pay for business-related expenses or even receive income in your personal account. But it is important to separate your finances early on, as it can get really hard to understand what was for the business and what was personal, especially for tax season. Keeping personal and business finances together has many costs beyond getting lost sorting through months of transactions; you can lose potential profits and pay more in taxes, as every transaction that could have been a write-off come tax season is lost in a void of mixed expenses.
Here is a step-by-step guide on how to successfully separate your personal and business finances:
Get an Employer Identification Number. Even if you are operating as a sole proprietor, I recommend obtaining an Employer Identification Number (EIN), as many banks require it to open a business bank account.
Open a business bank account. Now, opening a business bank account depends on the type of business structure you have. Most either have a sole proprietorship or a simple single-member LLC, but the process is similar, with a few key differences.
For Both: On both accounts, you are still submitting personal information, such as your name and contact information.
Sole Proprietor: You have to provide your personal ID, Social Security number or EIN if you get one, and your full name; unless you plan to get a Doing Business As (DBA) certificate, in which case you would use the name listed on the certificate.
Limited Liability Company (LLC): For an LLC, you submit proof of your Articles of Organization for proof of the business, an Employer Identification Number (EIN), and a Business address. (unless you are doing business at your home address, in which you would just add your home address)
Getting your EIN and opening a business bank account can make it really simple to keep your finances separate. The final step on this journey is getting a physical card for your business bank account so that, going forward, all your business-related expenses and income will be deposited into that account and remain separate from your personal account.
Whether you have already used your personal accounts to pay for business expenses or are starting from a clean slate, keeping your business and personal finances separate is a stress reliever and gives you clarity on where you stand in your business. If you want to begin your journey toward clarity in your business and grow with confidence, consider working with a professional bookkeeper like Extrovna Bookkeeping to ensure your finances are accurate, up to date, and give you time back to focus on growing your business.
