If you do nothing more – Do this ONE thing that will protect your business and yourself

If you do nothing more – Do this ONE thing that will protect your business and yourself

Stop!  Don’t make another business transaction until you do this one thing…  

It isn’t sexy, but it’s necessary… 

Keep your business and personal funds completely separate!

Note: If you formed an LLC or an S-Corp, then you are required to keep these separate in order for your new entity to protect you and your assets. 

Life gets busy, but when you are on the fast track for your day, you cannot use your business debit card for groceries at the grocery store or consider your visit to the doctors office as health insurance!  These are both examples of personal expenses.

In theory this is a simple concept, however, we cannot tell you how many new business owners have made this mistake!

The good news is it can be easily avoidable!  Simply follow these 3 steps:

  1. Set up a business checking account
  2. Transfer money from your personal funds into the new business account to get started.  It’s perfectly normal that a new business is cash poor, so deposit a lump sum to get started. If you cannot afford a lump sum, then periodically move money into the business account. The key here is, do not move money in and out. That looks like the business account is your personal piggy bank.
  3. If you need to pay yourself, then write yourself a check or transfer the money into your personal account.  If you are a S-Corp, talk to your accountant about how best to take distributions and/or a payroll.

What if you are using a credit card?  Can you use your personal credit card for business expenses?

Heck yes you can, but here is the caveat – it should have a zero balance before you start placing business items on the credit card.  Keep it separate from your personal funds. What is business needs to stay business

New businesses have a hard time getting qualified for a business credit card, so it is common to use a personal credit card until the business builds up some credit.

Can you have more than 1 credit card? Of course you can!  The same rules apply.

Let’s talk about some expenses that as a new business owner you have and aren’t sure if they are paid out of the business or personal account.

  1. Health Insurance – If you have a health insurance policy that you purchase, pay for this out of the business. The policy for you and your family does not have to be in the business’ name to pay from your business checking.
  2. Cell Phone – If you are the only one on the plan then yes pay for it out of your business account.  Again, the plan can be in your personal name or the business’ to take the tax deduction.  If you have a family plan, just keep paying it from your personal account. Your accountant should make the adjustment when preparing your tax return.
  3. Internet – If you have a home office, you are eligible to deduct your business share of internet services, but continue to pay out of your personal checking account. So often we have cable included in our internet service or other family members also using the internet service.
  4. Gas – You can only take gas expenses if the vehicle is in the business’s name.  We do not recommend placing a vehicle in a new business unless it is a specialty vehicle. For example: an electrical truck.  Track your mileage and take the mileage expense at the end of the year.  Once you have a few years in the business, you can have that conversation with your accountant.

Keeping business and personal funds separate are imperative to protecting yourself, but there is a huge benefit to doing so. 

It makes your life so much easier because you now have all of your business income and expenses in one place.  Wearing all of the hats as a new business owner is a lot to manage.  Generally, funds are usually still low so you cannot afford a bookkeeper nor do you have the time to mess with accounting software.  You will get behind in tracking your expenses but when you keep the expenses separated, it is easier to get caught back up.  

Let’s face it, when you get behind and are looking at a pile of receipts – taking the step to clean it up is overwhelming.  Avoid this situation all together and keep those funds separate!