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It’s so much easier when you keep your business and your personal life separate and well organized. Read more from tax expert Barbara Weltman on why you need to separate your business finances.
The owner should set herself up with a salary. If it’s a corporation or Subchapter S, the owner should be made an employee. For a sole proprietor, she could simply set up a regular withdrawal or transfer every two weeks into a personal account.
This enforces the separation of funds. Taking a salary is the main way to break the habit of dipping into business accounts for personal expenses at irregular intervals.
Do not take them as irregular ATM withdrawals or by paying personal bills here and there. It makes planning much harder. Plus, the funds are more likely to get frittered away instead of being earmarked for important purposes such as a SIMPLE or 401k retirement plan.
Make distributions a planned event once or a few times a year. Build them into your tax and retirement planning. Make them part of your growth strategy.
It also adds extra steps to your bookkeeping. You can’t simply download your monthly transaction history into your accounting software and have all business charges in one place.
Apply for a business credit card as soon as you have revenue coming in regularly. It will also help establish a separate credit history for the business.
Good recordkeeping helps you stay out of tax trouble. Often it isn’t bad intent that gets small business owners into hot water with the IRS and other taxing authorities. Rather, poor bookkeeping and lack of documentation cause unnecessary problems. It’s a forced error.
Good tax planning becomes difficult when you don’t have a clear financial picture. So you’re likely to arrive at tax time only to discover there were strategies you could have employed to reduce taxes. But because you didn’t have good books and the ability to look ahead before the tax year ended, you missed out.
Don’t just pull out money from your bank account in dribs and drabs. You will lack a clear picture of what your monthly expense burn rate is for the business. Your burn rate should be burned into your brain!
As an owner, you also need to know how many sales you have to make each month to cover your burn rate.
Be sure to run a monthly Profit and Loss statement and other financial reports. They help you stay on track.
When you don’t pay obligations when they are due, that’s a key time when questions arise over personal use of business funds. Everything may go along fine with no one raising objections UNTIL the business stops paying.
Rule of thumb in business: pay everyone you owe on time. You will avoid a large chunk of legal entanglements this way.
If you have an investor, a business partner, shareholders or members in an LLC – be extra scrupulous in funds handling. Respect that they have a right to visit our web site know how business funds are being used and a say in it.
By separating business and personal, and following best practices, it keeps everything above board. It also helps avoid the appearance of impropriety.
In conclusion, dipping into a business account every time the owner needs a little extra cash is a terrible way to run a business. Be a smarter business owner.
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