Many business owners make the mistake of combining business and personal finances, using personal funds to pay for business expenses or business funds to cover personal expenditures. While it may not seem like a big deal when you’re doing it, commingling business and personal finances can leave you with a tangled mess to unravel at tax time.
Here are three important steps to take to keep your finances in good order:
Establish separate chequing accounts for personal and business monies. Having separate accounts helps establish better recordkeeping habits that can benefit you at tax time and throughout the year, and it can also help during an audit if you need to prove your business is a business and not simply a hobby. Likewise, if you use accounting software, keep a separate system for business and personal use.
Apply for a credit card for your business. You might not be able to qualify until your business is a little more established, but once you have one, it can be a huge help in keeping accurate records of business-related expenditures. If you apply and are turned down, consider opening a business account with a local office supply store to gain a little credit history for your business and then apply again after a few months. Also, any interest you pay on a business credit card is tax deductible.
Give your business some credibility. Consider incorporating a company rather than operating as a sole proprietor or partnership. Incorporation can add credibility and can also help protect your personal assets against business losses – for instance, if your business is ever sued. Having an “official” company also makes it easier to acquire business credit. If you’re not sure whether to incorporate your business, consult with your accounting firm or attorney to discuss the pros and cons.
Even if your business is small, it’s vitally important to keep personal and business finances separate. Not only will it aid in helping you grow a more successful business, but it will also provide considerable peace of mind in the event of an audit.