How To Separate Your Business & Personal Finances

As a small business owner, you’re going to have a lot of overlap between your business and personal finances, especially when you’re starting out. But separating your finances will not only help you pay less tax, it will help you avoid catastrophe if anything should go wrong. In this article, we’ll look at just why you need to separate business and personal finances, and some simple tips on how you can do this.

Why it’s important to separate your business and personal finances…

Liability

When your business and personal finances are combined, the bank views you as personally responsible for the business’s successes and failings. This is called ‘piercing the corporate veil’. If anything should go wrong with your business and you have debts outstanding, the bank will seize your personal assets to cover these debts. At the end of the day, you don’t want your house mortgaged to pay for a business misadventure.

Savings

By separating your business and personal finances, you save money in two ways. First of all, you make a habit of doing something that your accountant or bookkeeper would have had to do, which saves you the fees you would have paid them. A secondary money-saving benefit is that with your personal and business expenses clearly defined, you’ll be in a better position to claim tax deductions and pay less tax.

Credibility

Another benefit of separating business and personal finances is that you increase the credibility of your business and over time, increase your borrowing power. This is particularly helpful if your personal credit score is low but you want to grow your business. Having a business credit card will eventually increase your borrowing power.

How to separate business and personal finances…

Seek Advice

Business advice needs to come from a person. Don’t feel overwhelmed by the financial side of your business, there are services out there which can offer support. Whether this advice comes from an accountant, or a service like Just Done, you’ll get the human touch to help you minimise tax and increase your profits.
Create a separate account

Rather than having your business income and expenses mixed with your personal transactions, you’re better off having two account. This clear divide means you don’t have to sift through your bank statements trying to work out which payments and expenses fall into which category.

Get A Business Credit Card

Having a credit card for your business is great for a number of reasons. If you can use it for most or all of your business transactions, your bank statement will be a clear list of your expenses. With a credit card, you can also claim your interest as a tax deduction.

Pay Yourself A Salary

When your business and personal finances are lumped together, it’s hard to keep track of your personal income. Instead, create a budget that ensures you get paid enough money to live off and provides a safety net. Decide on what figure you need as a base salary to live off, and calculate how much you need to charge to make that happen.

Use a Logging Tool

There will still be some expenses that cross the boundaries between personal and business, such as your car, your phone or your home office. While it can be difficult to know exactly how long you use your phone or car for personal or business activities, there are a number of logging apps, such as MileiQ and Helpmaster Pro, to help you keep track.