There’s a lot to learn during your first year of business, especially regarding finances. However, one mistake new business owners should always avoid mixing their personal finances with their business finances. This mistake could cost them considerably when tax season comes around.
If you want to avoid a lawsuit, it’s best to take precautions regarding handling your finances. However, keeping your personal and business finances separate isn’t tricky, and the following steps will help you keep them apart.
Make Sure You Have A Separate Business Entity
Once you start your business, you will need to file for an Employer Identification Number (EIN). After receiving your EIN, you will need to establish a separate business entity. This could be LLC (limited liability corporation) or Ltd (limited company) to make your business official. Doing these two things is the first step you need to separate your business from your personal life.
Establishing a separate business entity is also an excellent way to protect your assets. If anything were to go wrong with your business in the future, this ensures that they can’t come after your personal property.
Have A Separate Business Account
Business owners face enough stress during tax time. One thing they don’t need to add to their plates is trying to figure out which expenses were personal and which were business. This is why it’s necessary to keep your finances separate from the beginning. As a business owner, you have so much responsibility on your shoulders; the last thing you need to deal with is separating a year’s worth of expenses.
Get A Business Credit Card
You should never use your credit card for business expenses. As we mentioned with your bank account, separating the transactions at tax time is a significant pain. However, there’s one other reason you need a separate credit card as a business owner. Your business has its credit score. Having a business credit score allows you to expand as your business grows.
Setting up a company business credit card is a big step. However, using a credit report API can give you accurate updates on your credit score and advice on making good financial decisions. If you are a new business owner who isn’t very experienced in the finances department, then the aid of a credit report API can be very beneficial.
Don’t Mix Receipts
Out of habit, so many of us discard our receipts once we’ve made our purchase. You need to save every receipt from a business expense for tax season. Create a separate area for business receipts, and store everyone there. It will make your life so much easier when tax season arrives.
To avoid a future headache, make sure you never purchase a personal item on the same receipt as a business item.
Track Usage Of Personal Items For Business Use
The thing that most new business owners forget to do is to track their use of personal items when they are needed for business. If you have to make a run out of town in your personal car to pick up supplies, log the mileage and save the receipts. You will be able to write this item off for use when you do your taxes.
One Last Thing
One more thing you can do to make sure your personal and business finances never get mixed up is to train your employees to make sure they are on the same page as you and can tell the difference between the two expenses.