8 Tips to Help You Separate Business and Personal Finance
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Are Separate Accounts Required for Business and Personal Finances?
Sole proprietorship: This kind of business is owned by an individual and, legally speaking, it does not have an existence separate from the owner. Any business income or loss is reported on the owner’s personal income tax return. Therefore, sole proprietors aren’t legally required to separate personal and business funds. That said, a sole proprietor might still consider creating separate accounts because, in an IRS audit, the burden of proof lies with the business owner to clearly show business income and expenses. Limited liability company (LLC): An LLC is a business structure in the United States that blends elements of sole proprietorships and corporations. One benefit of an LLC is that the business owner is not personally liable for any of the company’s debts. Unlike a sole proprietorship, an LLC is required to have a separate business account. Corporation: Corporations are legal entities that are separate from their owners. Because this type of business has many of the same rights and responsibilities that a person has, it has been referred to as a “legal person.” Like an LLC, corporations are required to have their own business accounts, separate from any personal ones their owners may have.
Benefits of Separating Business and Personal Finances
8 Tips on Keeping Separate Business and Personal Accounts
1. Get an Employer Identification Number (EIN)
2. Open a Business Bank Account
3. Get a Business Credit Card
4. Create a Small Business Budget
5. Pay Yourself a Salary
6. Manage Business Cash Flow
7. Create Consistent Company Policies
8. Borrow Strategically, When Needed
Determine the purpose of the loan. It could be for startup costs, for example, or to purchase equipment or inventory. Calculate how much money is needed. Don’t underestimate what’s required. A realistic estimate can help to reduce stress and prevent the need for additional loans. Consider what you might be eligible to receive. Lenders assess risk before approving loans, often by reviewing business credit scores, cash flow, and other factors. Choose the type of loan that’s right for your business. Each type has pros and cons, including getting a personal loan. During that process, also compare types of lenders. For example, it can be easier to qualify with an online lender—but be sure to explore your options before deciding. Gather the documents needed to apply. This will likely include business and personal financial statements and tax returns, business legal documents, and personal ID, among others.
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