Business and finance require a significant amount of organization and a keen eye for figures. Muddying the water with your personal finances can make the already stressful task of running a company even more difficult. Here’s why you should keep your personal finances and your small business finance separate.
What is personal finance?
Generally, the definition of personal finance refers to any money related to personal activities, i.e., tasks you undertake as an individual, not on behalf of a company. This includes
Personal credit card
Bottom line, your personal finances shouldn’t be tied to your business in any capacity. For example, your personal credit card should only be paid off from your checking account. By contrast, a business credit card would be linked to your business finance bank account, which any authorized member of your company can access.
Do I need to separate my small business finance and personal finance?
Depending on the type of business you run, it’s not always essential to separate your finances. A sole proprietorship can operate without separate business bank accounts and finances, adding your business tax to your personal tax return. But just because you can, doesn’t mean you should. For the sake of clarity, you should consider separating your finances, even if your business is just a small part-time hobby you’ve monetized. This way, even if things go wrong, your personal finances aren’t legally tied to your business. Here’s how to get started.
1. Get an Employer Identification Number (EIN)
An EIN is given to your company by the IRS. It’s free to apply for an EIN and it’s required if you want to file a business tax return. Once you have an EIN, you’ve begun the process of separating your business and personal finances, and now you no longer have to use your social security number for anything related to your business.
2. Become incorporated or set up an LLC
There are a range of different business entities yourcompany can be registered, but a corporation or limited liability company (LLC) will allow the business, and its finances, exist separately from you from a legal standpoint.
3. Open a business bank account
With an EIN and a new company structure, you’ll need a business bank account that you use only for your company’s financial needs. This includes cash deposits, invoice payments, and funds for any expenses and bills. It also ensures that you can stay on top of your personal savings and goals without your business complicating matters. If you’re a corporation, you’ll need to present your bank with your articles of incorporation and any business licenses or documentation required by your state.
4. Get a business credit card
Now you have a business bank account, there’s no need to continue jumping between your personal finances and your business funds. Next step? Apply for a business credit card, linked only to your business bank account. Now, whenever expenses come up, they never come out of your personal bank account. Be careful that you keep your business credit card usage separate from your personal card. Using a business credit card for personal purchases can be in violation of the card lender’s agreement, leading to the closure of your account, and a real blow to your credit score.
5. Start building a credit score
A good credit score will be essential as your business grows, even if your plans are no grander than leasing a car. Set up a business credit profile with the main credit bureaus, i.e., Equifax. Maintaining a good business credit score is simple – make all payments on time and don’t become reliant on credit to fund your business. By having healthy lines of a credit for your business, you minimize the risk that you’ll have to dip into your personal savings.
6. Consider a bookkeeper
Once you’re up and running and all your finances neatly divided, you’ll need to face the fact that you have two loads of money management to deal with. Business and finance can be overwhelming. Consider hiring a small business accountant a few times a year to make sure you’re on track.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.