Written by: Alizé Utteryn, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Certain things are better left separate – like your business finances and your personal ones. However, for many business owners, this is one of the biggest challenges they encounter.
Maybe it's time to put in place the right strategies to spend better and increase your income?
At the beginning stage of your business, you might be tempted to delve into your personal finance to either boost or save the business. This usually is not a good idea, especially in the long run. Whether you’re just starting out or not, knowing where to draw the line in both will not only save you from potential errors in recording but also help you manage and upscale your finances effectively.
If the process of separating your business finance from your personal finance is alien to you, you need not bother because I will explain below why this is important to you and your business and practical steps to separate your business finance from your personal finance.
Why should I separate my business finance from personal finance?
1. Tax implications
During the filing process, a lot of your time and stress will be saved if your personal and business finances are separate. You could quickly and easily provide a record of your business expenditures for filing.
If your office expenditures or purchases are not recorded or clearly separate from your personal finance, merging your personal finance and your business finance will be inevitable, and of course, this will affect the filing of your personal taxes.
2. Business credit
This is another serious reason to separate your personal finance from your business finance. Your business will need capital for it to grow, and having a business credit will allow you to obtain large business loans. If your personal finance and business finance are merged, it will be a herculean task to provide your business income to agencies, making it almost impossible to build business credit.
3. Personal liability
Sometimes, it is necessary for young businesses to sign personal guarantees for loans and leases to build a strong credit rating for their business. Despite this fact, you should avoid these personal guarantees most of the time because it can be a risky venture. The way to go about this is by establishing a strong business credit. With this, potential lenders will see clearly that your business has the capacity to settle its debts.
4. Leverage
One of the key differences you’ll encounter is the effect of leverage on the health of your personal and business finances. Leverage can be used to increase your business profits. In fact, businesses are encouraged to use leverage as a way to increase profits i.e. you can use borrowed funds to invest in your business. The reverse is the case when dealing with personal finance. Using leverage here could spell potential danger as it would mean putting your business assets on the line. It’s always advisable to keep your personal affairs separate from your business finance, especially if you intend leveraging, as it can become very risky when funds get comingled.
5. Professional image
Separating your personal and business finance is important for your business’s professional image. Your business will appear and be taken seriously. Having different bank accounts for your personal and business finance, for example, goes a long way in building your professional image and business identity.
Steps to separating your business finance from your personal finance
Having established the importance of separating your business and personal finances, let’s have a look at the practical steps you can take to keep them apart.
1. Create a business checking account
One of the first things to do when setting up a business is to open a business checking account. In fact, this is one major decision you should make when trying to separate business and personal finances. Opening a business checking account encourages efficient record-keeping as a good habit. It also positions your business expenses for tax deduction.
Beyond that, the presence of your business account makes for easy financial tracking as the Internal Revenue Service (IRS) will be sure that your venture is actually a legitimate business enterprise.
2. Establish your business entity type
Establishing the type of business entity you run is perhaps one of the most important steps you can take in helping to keep your business finance far from yours. You can either incorporate your business as a corporation or Limited Liability Company (LLC). Doing this will establish your business as a separate legal entity. Filing your business tax returns will also be separate from filing your personal tax returns.
Setting up your business as a Limited Liability Company is one easy way to separate business debts from personal debts. This type of business structure not only provides improved credibility, but it also provides legal protection for you, the business owner. Already, this is a separation of your business finance from your personal finance.
3. Get a business credit card
I have already mentioned the importance of business credit to a business. It actually is a big deal. Getting a business credit card is an easy way to build your business credit. Having a business credit card, you should avoid using your personal credit cards for any business purpose. This goes a long way in preventing your business deals from encroaching on your personal credit. Also, you will be enabled to enjoy reduced card costs that come with using your card exclusively for business expenditures.
4. Prepare a budget
Preparing a budget allows for proper planning. Indeed this initiative will shield you from making unplanned and unnecessary expenses. Preparing a budget prevents you from spending business funds on personal needs and vice-versa. In as much as you could encounter situations that may render encroaching into your personal finance inevitable, a budget can help you keep your business and personal lives properly separated.
Without a doubt, separating your business finance from your personal finance is not the easiest thing to achieve. It can be quite overwhelming for business owners, especially startups. However, once you develop these habits, you can be proud that your business is on its way to success. It is important to take action to gradually improve your habits related to money. It's not about getting rich, but rather having a healthier management of your personal finances. Better management will lead to a less stressful life and towards achieving a specific personal or professional project. Managing a budget will result in a better view of your income and expenses over the long term. Expenses must be controlled and unnecessary ones eliminated. Planning in advance will allow you to save money and finance your projects through programmed saving. May your financial habits of today not become your anguish of tomorrow!
To summarize, be mindful of your finances and take action to make adjustments. If you struggle to manage your finances properly, I strongly recommend hiring a financial coach, who will assist you in organizing your finances overall, so that you can make better decisions in business and in your personal life.
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Alizé Utteryn, Executive Contributor Brainz Magazine
Alizé Utteryn is an award-winning serial media entrepreneur, businesswoman, publisher, journalist and international networker based in New York. After a successful professional career as Senior Human Resources executive in France and the Czech Republic, she came in 2009 to the United States... She has since become a leader in Media, Communication and Public Relations. She is the CEO of AlizéLaVie, a global media and marketing company. promoting cultures diversity and talents around the world. Her mission is to empower change, share stories, elevate and inspire... Passionate philanthropic, her leadership and unfailing determination to make a difference in this world are often praised while inspiring others.
