Keeping your business and personal finances separate is an oft-heard piece of advice, yet 23% of small business owners were found to mix personal and business expenses on their commercial cards, a survey from Fundera reveals. Not only does keeping the two separate keep your finances organized and simplify tax time, but it also has important legal benefits — namely, protecting your personal assets from debts, losses, and lawsuits. Here are some simple changes you can make to avoid mixing personal and business finance.
Open a business checking account
The easiest way to separate personal and business finances is to open a business checking account. Be aware, however, some banks have requirements for the minimum amount deposited each month or the average daily balance. If you don’t qualify for a business account, begin by using a second personal account for business revenue. You can then upgrade to a business account when you’re making enough money to meet the bank’s requirements.
Get a business credit card
Once you’ve got a business checking account, get a business credit card to use for business purchases. If you have a sole proprietorship, LLC, or S-Corp, your personal credit will be looked at to assess your suitability for business credit. A low personal credit rating may hinder your application for business credit. It’s therefore important to improve your personal credit by making credit payments on-time and in full while turning to short-term loan options to cover necessary expenses. On the other hand, personal credit matters less if you have a C-Corp, but may still be looked at during your application for business credit.
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Pay yourself a salary
Withdraw a salary each month from your business account to your personal one to cover personal expenses. When determining your salary, draw up separate personal and business budgets to inform your decision. Most small business owners typically limit their wages to 50% of their business profits. You’ll also need to set aside money for taxes and significant business expenses. Treating yourself like a regular employee will help separate your business and personal finances and keep your expenses easier to track.
New business owners often mix business and personal finances, but this just causes stress and complications at tax time. Working to separate your business and personal expenses doesn’t need to be difficult. Follow these tips, and you’ll find yourself better organized and better able to focus on growing your business and making a profit.