Why You Should Keep Your Small Business Affairs Separate from Family Life
Keeping your small business finances separate from your family life is a smart strategy for many reasons. In fact, not separating the two is likely to cause all sorts of confusion – both for you as a small business owner and for you as the head of your household. For instance, if your company finances are mixed with your personal accounts, you really won’t know how well your business is doing, nor will you know how much money you can afford to spend on yourself and your family.
Are you paying the mortgage on your house with funds that should be going to your business’s marketing department, or canceling a vacation because you’re concerned that there will be a shortfall in your payroll? Being a small business owner is difficult enough without having to do mental gymnastics each time you pay a bill. So even though you may have begun your business with a personal loan, the sooner you can separate your business finances from your family’s, the better off both will be.
Income Taxes and Business Entities
A significant reason to separate your finances is because it will simplify your income tax computations and help you take advantage of rules for business reporting. For example, the Internal Revenue Service (IRS) allows you to write off certain business expenses, but only if they are clearly delineated from personal ones. This is especially important if you are using a room in your home as your main place of business and intend to deduct its costs on your tax return.
In addition, if your business and family finances are one and the same, it may be more difficult for you to get a business loan. Lenders are not interested in extending credit to finance what could appear to them as a hobby. If you wish to be taken as a serious small business owner, you need to present yourself as such. At the very least, you should get a separate tax identification number (TIN) for your business, and not use your personal Social Security number for tax reporting purposes.
You could also establish your business as a limited liability company (LLC), or an S Corporation. These business entities put a legal boundary between your business and your family, so your personal finances are protected against confiscation, should your business ever get sued. Conversely, if creditors are going after you for debts owed on your personal account, your business funds cannot be taken to settle them.
Also, it’s important to remember that you are not always the only person involved in either your business or personal finances. A spouse may have equal access to your checking account and without knowing it, spend funds that you were planning to use for your business. The same may hold true for a business partner or employee who is authorized to pay vendors, and without realizing it, puts your personal account into the red because you’ve just written a large check for an unforeseen home repair.
Separate Your Accounts
The first thing that you should do is set up a separate checking account for your business. Open the account with a DBA (Doing Business As) designation and have the business’s name printed on the checks. Next, get and use a business credit card under the same DBA. The separate checking account and credit card will help your record-keeping and give you an added tax deduction at tax time.
Separate your accounting systems, as well, with one for personal finances and one for the business. This will improve your overall organization and make tax filing easier. Once you have completely severed your business account from your family finances, consider paying yourself a salary. This will make it easier for both your family and your business finances to stay on track.
You may not be able to entirely separate certain items – like a cell phone or an automobile – from your personal or family use. In these cases, it’s important to keep careful logs as to when you are using one or the other for business. Remember: Business travel and business phone calls are tax deductible, while personal travel and personal telephone use are not.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].