Most startups are financed with the personal funds of their owners. This practice is often the most direct approach to kickstarting their dreams if they are unable to qualify for traditional financing or secure alternative funding. However, as the business grows, small business owners should strive to separate their personal and business finances. Doing this necessary step can prove to be beneficial in several ways. It provides a clear separation for your finances, makes the business look official and professional when dealing with customers and vendors, and it can reduce the likelihood of an IRS audit or having deductions denied by the IRS.
When your personal and business finances are entangled, it can be difficult to make heads or tails of where one ends and the other begins. Things can become even more complicated when you add employees to the mix. To protect yourself, your hard work and your investments, here are 5 Ways to Separate Your Personal and Business Finances from the Small Business Administration:
- Open a Small Business Bank Account: To keep personal funds and business funds completely separate you must have two different bank accounts. On personal checking account and the other a small business checking account. This sets you up for clean and accurate bookkeeping so when tax time rolls around it will make it easy for your accountant.
- Apply for a DUNS Number: A DUNS number is the most widely used identifying number for businesses in the united states. It enables you to build a business credit identity for your company completely separate from your individual credit profile.
- Create a corporate Presence Online: A company web site and dedicated email address are expected in today's business environment. Your business should have its own dedicated IP address separate from your own personal web sites.
- Set Up Utility Accounts in the Company's Name: The utility services you pay to operate your business should be established in your company's name. This includes business phone lines, cell phone services, internet service, cable services, etc. These service accounts are the expenses your business pays on a monthly basis so it's important to handle them accordingly.
- Apply for Credit in the Company's Name: When applying for credit with a supplier or vendor, be sure to submit your company information on the credit application. With trade credit, suppliers, vendors, and retailers will extend financing terms ranging from net 10 to net 60 days. This will enable your business to establish credit history plus buy products and services on credit while deferring payment for 10-60 days.
- Acquire a Business Credit Card: The primary tool for separating personal and business charges is with a business credit card. Business credit cards allow you to track your business expenses, control spending and build your business credit. Some cards even offer special rewards and perks.
While you may not be able to accomplish all of the suggestions above immediately, taking the steps to keep your business and personal finances separate will pay off in the long run. Your business was meant to fuel your dreams and bring you personal and professional success. Not properly securing your business finances can cause them to be the fuel to your financial demise. At the end of the day, making a distinction between your business and personal finances can protect your personal assets and credit in the event the business runs into legal or financial trouble.