How to keep your business and personal finances separate

tegwrtgrttgwetgtgWhen you’re launching that side hustle or new venture, it’s tempting to just run it informally and with a minimum of extra effort. Personal email, phone numbers and bank accounts are often your go-to solutions. But in all cases, it’s worth the trouble to establish a separate business identity, and especially when it comes to your finances.

In the early days of freelancing or starting a new business, it may seem easier to pay for expenses out of pocket and let income flow to your personal accounts, but when tax time comes, you’ll wish you’d been more disciplined and less casual about keeping your business books separate from your personal accounts.

There are several reasons why separating personal and business finances is valuable. On a psychological level, it can help you differentiate and respect the well being of your business. On a practical level, you want to be able to see the state of your business and compare expenses against income. If you have a dedicated account, this is a much simpler matter, and you’re less likely to overspend. When it comes to tax time, or if you have to provide financial records to banks, investors or business partners, it can be much less embarrassing and more effective to present business accounts without all your personal shopping (or income) showing up in the mix. Tax authorities tend to be suspicious of mixed accounts and concerned you’re deliberately or inadvertently claiming personal expenses and hiding income. You want to preempt any audits and penalties by operating in a transparent, responsible manner. Separate accounts show that you know how to operate as a professional and respect your business. They can also shield your personal finances in case of litigation.

So how do you go about separating your business and personal finances, especially if you’ve been freelancing or running a side hustle for a while now?

Make it official

Your business needs a paper trail to prove its existence to a bank. Depending on regional laws and your business type, you may need to provide a business license, registration or incorporation documents. Some banks may allow sole proprietorships to open a business account without formal documentation, and if they don’t, it will still be worth your while to open a separate standard account to separate your finances. Take some time to look into the legal status and protections afforded by different business types before dismissing a formal registration, though. Taxation and legal rights vary depending on region and business registration type, and sole proprietorship may not be the most beneficial choice for you.

Open business banking accounts

Now that you’ve gotten clear on what type of business organization you want to operate as, and have the documentation to prove it, you can start looking into business banking options. You’ll want a checking account as a bare minimum. Looking for one with low or no fees, good online banking tools, and as an added bonus, mobile check deposits for those times when your clients are old-school and high maintenance. To choose the right savings account, consider what your practical needs will be: can you maintain a minimum balance in your savings account, in return for higher interest or lower/no fees? Is this a key part of your long-term success strategy, or just a hopeful nice-to-have? Saving up a contingency fund for market shifts and surprises is a business best practice, so it’s worth opening up both account types.

Get a business credit card

Depending on your cash flow situation and regular business expenses, it may be worth getting a business credit card. Compare fees and benefits to find the one that rewards you in a way that helps your business and rewards your most common use patterns.

Use bookkeeping software

It can be as basic as a spreadsheet or online banking feature, or as shiny and slick as a custom small business bookkeeping app, but it’s time to get serious about your record keeping. Log all expenses and income regularly. Better quality software will be able to help you with alerts, projections, and reporting that can help you keep track of your business’s financial health and projected well-being. It’ll also reduce your pain come tax time, and simplify reporting for investors, business partners and tax authorities.

Pay yourself

One big shift as you switch your accounts over from personal to business banking is any income you bring in won’t just flow straight into your account. This can be a very good thing, since it means you’ll find it harder to accidentally overspend and damage your business. It also reassures tax authorities that you’re not hiding income as birthday money from Grandma. But it means you need to start paying yourself, and recording withdrawals as such. The best practice is to assess your business income and withdraw a set amount at set intervals as if it’s a traditional salary, but not all businesses are in a place to do this from the start. If it’s a side hustle or freelance sole proprietorship, you may make occasional withdrawals as needed or appropriate, but keep in mind that one of the positive aspects of separating a business from your personal accounts can be to manage taxation, and it may be to your benefit to keep a larger sum in a business savings account or reinvest it into the business, rather than paying personal taxes on that income in a given year.

As you review your year-end earnings, it may be time to separate your personal and business finances. Collect legal records, do your research on account types, keep track of every time money changes hands, and be sure to pay yourself after you switch over.

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