YOU may have started your business without thinking about what the future holds.
When you first started your business, like many other entrepreneurs, you may have used your personal assets as startup capital, and used your personal credit score to secure a startup loan.
As your business grows, creating a clear boundary between your personal and business finances as well as maintaining supporting documents to prove that separation, is crucial to staying on the right side of the law
Who must keep business and personal finances separately?
If your business is a corporation you must keep business finances separate, because the business is considered a separate and legal entity.
If you have structured your business as a sole proprietorship, it’s considered an unincorporated business with no legal distinction between your business and yourself.
Through the sole proprietorship all profits, losses and liabilities are tied to you personally, because of this it’s even more important for a sole proprietor to keep business and personal finances separate in case of an audit.
An audit puts the burden of proof on you to disclose your business expense and income keeping good records saves you from having to dig through a huge box of receipts to figure out which purchases were for business and which were for your personal expenses. Keeping your business finances separate also reduces your legal liability and can help you manage your tax and business bills more efficiently
Are there record keeping requirements I must meet?
Account regulators, don’t require any specific record keeping system, except in a very few specific cases, but you should use a system that clearly outline your business income and expenses. According to website research, there are hundreds of resources explaining what records you should keep, such as from a record keeping stand point, one great way to separate your personal and business finances is to make separate banking accounts for each.
Choosing a bank account
When choosing a business bank account, keep in mind that all banks want business. This means you can usually negotiate some free discounted services. You might consider going with a bank, where you have your personal bank account for easy transfer of funds or you might find a bank more suitable for your business operations and open your business account there.
Understand their minimum balances and fee structures. Ask around and see where other business owners bank and why.
These days, banks are trying to use a personal touch to keep customers loyal, so find a trustworthy bank representative who understands your business. Finally, if you run your business under a name other than yours, be sure to open the business account under the business name, not of your own.
Once you have opened a business account it will be easier for you to cover your tax obligations without having to delve into your personal accounts. This way when time comes to make payments you won’t be scrambling to transfer money to cover your taxes
Know the difference between business and personal expense
It is tempting to write off dining, travelling, or entertainment as a business expense.
However, it’s important that the activities actually pertain to your business. The same goes for your personal finances. By paying out- of- pocket for business expenses you run the risk of going into debt. Make sure you’re clear on what constitutes each type of expense.
Separating expenses also keeps you more organized, easing the stress on tax time and keeping you ahead of the game in case of an audit.
Create a budget
Budgeting acts as a roadmap for both your small business and your personal life. It can highlight finances, strengths and reveal areas that might require financial assistance.
Once you’ve created and are adhering to a budget, the stress of financial uncertainty is lessened and unexpected large purchases can be made more confidently.
Maintain a good credit
Did you know your personal credit can be risk to your small business? If your credit history is weak, there are ways to improve it. Cutting down on crest card debt and making payments on time are two of the best ways to improve your credit history.
Be sure to review and also check to see if you’re spending within your limits
Hope this article is going to help you understand the importance of separating business expenses from personal ones.
The author is women in business consultant under the name Morvac Business Consultancy. For contributions to this article. Email: mulozwimwangala@yahoo.com or contact number 0977705884