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When you first start a business, you may not think much of making a small purchase of office supplies and paying for them with your personal credit card. This could be a manageable system if you only make a few business purchases each year. However, that isn’t the reality for most business owners. Although it will take a bit of initial effort to separate personal and business finances, you can expect significant benefits for doing so. We discuss several of these benefits below.

It Makes Tax Time Much Easier

Business owners have the potential to take many tax exemptions not available to the typical taxpayer. Unfortunately, taking these credits can make it more likely that the Internal Revenue Service (IRS) will conduct an audit. This is especially true if you claim a deduction for home office space. The good news is that separating your personal and business finances right away makes it easier to defend yourself should an audit occur. You may wish to consider consulting a Certified Public Accountant (CPA) for help filing your return if you have never prepared a business tax return in the past.

It Affects the Business Entity You Can Select

It’s best to keep your accounts separate from the first day of your business if you plan to operate under any structure other than sole proprietor. For example, laws in your state may prevent you from registering as a limited liability corporation (LLC), partnership, S-corporation or other common business structures unless you have already separated your finances. It will be much less of a headache later if you opt to change your business structure because you won’t have to separate finances then. This option is also available to sole proprietors, though not required.

Impact on Your Personal and Business Credit Scores

If you use personal credit cards to pay for business expenses, it robs you of the opportunity to build a credit portfolio and score under your business name. Another risk of doing it this way is that you would be personally responsible for paying the debt even if your business fails and you file for bankruptcy protection. Opening too many accounts for business under your personal name can also have a negative impact on your credit score. Once you open your business, focus on keeping personal and business finances separate and building a credit history under your business name.

How to Separate Your Personal and Business Finances

The first thing you need to do is open at least a checking account in the name of your business. You may even want to keep the accounts at separate banks. It’s also a good idea to make sure you receive statements each month and to study them carefully to ensure there is no cross-over. Be sure to keep detailed records and remain diligent about only using business funds for business purchases. Giving yourself a set salary can also help better determine your business budget.

If you feel overwhelmed at the thought of separating your personal and business finances, don’t hesitate to schedule an appointment with Doerhoff & Associates.   We know you can use all the help you can get to run your small business successfully, and we are here for you.  We strive to provide what you really want and need – a unique and customized set of services to fill the gap and support you, the business owner.