As a small business owner, you’re invested in the success of your business, both personally and professionally. You pour yourself into your business every day—working long hours and making sacrifices to help it grow.
Sometimes it’s hard to avoid crossover between your business and personal life when your work is your life. However, when it comes to managing your money, you’ve got to draw the line between business and personal.
Here are 3 compelling reasons to manage your business and personal finances separately:
- Better budgeting. Separating your business and personal finances gives you better visibility into both. Managing your business is easier when you can track revenue and expenses and see its financial status at a glance.
- Tax implications. When it’s time to do your taxes, having a clear breakdown of personal and business revenue and expenses can save time and soothe bookkeeping headaches.
- Legal protections. Keeping your finances separate may provide some protection from any risks or lawsuits brought against your business.
Whether you’re just starting a business or you already have a few years under your belt, you stand to benefit from separating your business and your personal finances. Take these steps to keep the two separate.
Get an EIN.
Setting up an Employer Identification Number (EIN) is an important step when you’re starting a business. An EIN is a 9-digit number assigned by the IRS as your official identification number for business purposes. Having an EIN helps keep your business and personal information separate because you can use your EIN instead of your Social Security Number to identify your business. This is helpful when you’re opening a business bank account, applying for a loan, filing your business taxes and more. It’s easy to apply for an EIN on the IRS website.
Establish a business entity.
Establishing your business entity type creates legal separation from yourself and your business.
Choosing an organizational structure that’s best for your business can help you set a path for reaching your goals. You can establish your business entity by filing the necessary legal paperwork with your state. Contact a qualified attorney for help answering questions and completing the steps involved in forming your business entity.
Open a business account.
Once you have a business membership, opening a separate account for your business transactions provides a simple and streamlined view of your business finances. This is an important step for any business owner, and it’s even more critical if you have a partner or employees making purchases and requesting reimbursements. Your business checking account is the hub for your business cash flow. A dedicated business account makes it easy to manage your business finances, pay bills, deposit checks, set up ACH payments and more.
Prepare for tax season.
Separating your business expenses means you won’t have to untangle your business and personal finances at tax time. Having separate accounts allows for clear documentation of business expenses—definitely a game-changer when you’re claiming business tax credits and deductions.
Blending personal and business expenses, on the other hand, can result in costly errors, wasted time, needless stress and a paperwork nightmare when filing your taxes. In the event that your business faces an IRS audit in the future, you’ll need to produce receipts for your business expenses.
Being prepared with organized records of your business expenses makes the process of completing your tax returns much simpler and also improves accuracy. Consult your tax advisor with any questions you have about filing business or personal taxes.
Simplify your financial management.
You can enjoy the benefits of maintaining separate business and personal accounts along with the ease of managing all your accounts under one roof. At Navy Federal Credit Union, we’re here to help you find solutions for managing your personal and business accounts. Visit our Business Solutions Education Center for more insights and resources for business owners.
- Request an EIN number from the IRS, register your business identity and use it to open a business bank account. You can also use this information to apply for a business credit card.
- Make sure that you keep all business transactions separate from all personal transactions. This clear distinction establishes the “corporate veil,” which is an important part of recordkeeping, taxation and liability.
- Work with a business tax professional to ensure you’re properly reporting business income to the IRS. Make sure to find a tax advisor who specializes in different business structures (LLC, S-Corp, C-Corp. partnership, etc.).
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.