Equally Important: Personal and Business Finances

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Success as a small business owner comes from treating your business like the bigger business you want it to become. That means making it clear to potential customers, vendors, bankers and especially the IRS that you are a businessperson who has turned your dream of owning a company into reality. This difference in how you are perceived not only helps you negotiate better deals—it also makes a big difference at tax time.

Where to Begin

Whether you’re already on your own, ready to turn your side hustle into your career or have been up and running for some time, here are five steps you need to take to ensure you’re setting your business up for long-term success.

Step #1: Operating Legally.

Violating local restrictions can quickly endanger the viability of your business and can result in prohibitive fines. Check your local municipality’s website, along with the Secretary of State’s office, for ordinances—especially if you are operating out of your personal residence—and any licensing requirements you may need to fulfill to conduct your business legally.  Consult an attorney if you have questions about how a law or regulation might impact your business.

Step #2: Limit Your Liability.

Co-mingling business and personal money may seem natural, but it can lead to complications, especially at tax time. Not only do your personal and business income and assets become indistinguishable, negating some of the tax benefits available to businesses, commingling can turn business liabilities into personal liabilities. Check with your legal counsel, insurance agent and accountant to determine if incorporating your business as a limited liability corporation or an S corporation might offer your personal assets—including your retirement savings and those you own jointly, such as your home—greater protection should a legal issue arise.

Step #3: Establish a Business Identity

While you may operate as a sole proprietor under your own Social Security number, you should consider applying for an Employer Identification Number (EIN) for your business as early as possible. This action creates a critical distinction between your personal finances and those of your business. It also can enable you to make purchases for your business at wholesale prices and without being subject to sales tax.

Step #4: Open Separate Accounts

A great way to prove you are a business, even while you are a sole proprietor, is to maintain business checking and business credit card accounts. While you might fund your business account with personal money initially and apply for the business card on the strength of your personal credit, use these accounts for business purposes only. This action also creates a paper trail for business income and expenses that you can follow at tax time.

#5 Reserve to Preserve

Paying quarterly estimated taxes can present a persistent obstacle for small business owners. Consider setting aside money as it comes in and sweeping it into a separate savings account.  This practice can limit any temptation to “borrow” that money to fund daily operations and also helps prevent a shortfall at tax time, which can lead to expensive loans and even costly penalties.

“Personal” You vs. “Business” You

As a small business owner, it can be difficult to know where the “personal” you stops and the “business” you begins. The sooner you can establish financial boundaries between the two, the easier it will be to communicate your intent to succeed as a stand-alone company. That, in turn, will help you build better vendor and banking relationships, both of which are vital to your future growth and ability to expand.
For additional guidance on setting up and managing your personal and business finances, contact an NFCC® Small Business Owner Financial Coach by starting here or calling 1-844-359-3792. Our small business owner coaches are happy to help you set yourself and your business up for sustainable success.