Many small business owners tend to think, “I am the business, and the business is me.” Though conceptually this may be true, it is critical to keep the financial fruits of your business separate from your personal endeavors – especially from a legal and accounting standpoint. Taking the time and effort to maintain autonomy between the two can have many benefits, including:
- reducing the likelihood of an owner of a business being held personally liable for company debts even if the business is a corporation or limited liability company (i.e., “piercing the corporate veil”),
- increasing the business owner’s ability to better gauge the true financial condition of the company and be equipped to foster more informed decision-making,
- simplifying tax preparation burdens by making it easier to determine deductible and non-deductible expenses,
- reducing accounting fees for the compiling of financial statements and tax return preparation,
- streamlining the IRS audit process and saving business owners valuable time and money, and
- easily compiling relevant financial information for potential suitors in the event the business owner decides to sell his/her business.
10 “Seeds” to Plant for Financial Segregation
Now that you more clearly understand the value of keeping personal and business finances separate, here are 10 best practices:
- Create a separate legal entity for your business. First, consult your CPA and attorney for help selecting the most appropriate entity type to accomplish your business objectives.
- Set-up a separate business checking account(s). Pay all business-related bills and record all business income in this account.
- Maintain separate file locations for personal receipts and business receipts.
- Provide a salary or regular distribution for the owner that is affordable for the business and is correct for the legal entity type you select. This process enables the owner and the business to budget accordingly.
- Obtain a credit card for the business to make it easier to segregate business expenses. The credit history that establishes can provide future ability to borrow money in the business’ name. Interest paid on business credit can be used as a business tax deduction.
- Carefully document business entertainment, food, and travel expenses. This item is a hot spot for IRS scrutiny. Your records must show the who, what, when, where, and why of each expense.
- Keep business contracts in the company’s name instead of the owner’s name.
- Borrow operating capital in the business’ name. Though sometimes borrowing capital personally or providing personal guarantees are unavoidable, remember personal assets and credit scores are at a greater risk.
- Maintain logs of business use of items – such as cell phones and vehicles – to enable the allocation of costs between personal and business.
- Create a home office that is used only for business needs. Consult your CPA for deductibility of certain household expenses based on the percentage of office space compared to the total square footage of the home.
CRI Can Help You Cultivate Your Financial Success
Keeping your personal and business finances on separate “trees” is critical to your business’ success. If you need guidance on how to classify expenses and maintain segregation between your personal and business finances, then contact CRI’s experienced professionals. We can help implement a system tailored to your business to accomplish proper segregation that accurately compiles your business’ financial information.