Numerous challenges come with starting a new business. One way to keep things clean and simple from the start is to separate your business finances and personal finances early on. It’s easy to mix the two—for example, putting business expenses on your personal credit card or dipping into money for your business to pay for personal expenses. Over time, this can be detrimental, not only for your business but also for your personal life. Worse, it could lead to legal problems.
Splitting your business and personal finances will make things far easier come tax season. Keeping separate bank accounts and credit cards for your business will make it easier to track and record your business expenses. This qualifies you to receive tax deductions and makes things more straightforward if the IRS audits you.
Having separate bank accounts and credit cards for your business helps make you look more professional when dealing with merchants and vendors.
Separating your business finances allows you to start building credit specifically for your business. Your business’s credit is separate from your personal credit scores and reports. It’s a good idea to concentrate on establishing and building your business credit as early as possible. This will allow you to apply for larger business loans and high-tier business credit cards when your business becomes more established.
1. Register your business as its own separate legal identity
The first step is to register your business. Research which business structure is best for your growth goals and consider forming a corporation. This will allow you to create a separate credit file under your business’s name and limit the liability of the business owner.
2. Apply for an Employer Identification Number (EIN)
After registering your business, apply for an Employer Identification Number (EIN) through the IRS website for free. An EIN, also known as a federal tax ID number, operates somewhat like a Social Security number for your business.
An EIN gives you the ability to open business bank accounts and apply for loans and credit cards under your business’s name. It can also be used in place of a Social Security number on business documents, which lessens incidences of fraud.
3. Open business bank accounts
Using your newly received EIN, open business checking and savings accounts in your business’s name. Use these accounts exclusively for business transactions and savings. This will help you better track your business expenses and capital since they’re managed separately from your personal accounts.
4. Open a business credit card
With your EIN and business name, you can open a business credit card in the name of your company, as long as your personal credit makes the cut. A business credit card that you use solely for business purchases helps you further separate your finances.
5. Set yourself a rigid salary
Setting yourself a monthly salary is vital to the health of your business, as it stops you from dipping into your business account as if it were your personal piggy bank. Set up a direct deposit every month from your business account to your personal account. Act as if a company is paying you a salary and budget accordingly.
Setting up, running, and managing your own business is a monumental challenge and a learning experience. Follow these five steps to help you build a firm boundary between your personal money and your business’s finances.
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I’m Andrew Brooks, a seasoned finance consultant from the USA and the mind behind phonenumber247.com.
My career is built on a foundation of helping individuals and businesses thrive financially in an ever-changing economic landscape. At phonenumber247.com, my aim is to demystify the complex world of finance, providing clear, actionable advice that can help you navigate your financial journey with confidence. Whether it’s personal finance management, investment strategies, or understanding the nuances of market dynamics, I’m here to share insights and tools that can propel you towards your financial goals.
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