8 Steps to Successfully Separate Your Business and Personal Finances
Step 1: If you haven’t already, gather your tax records and organize them by types, such as W-2s, 1099s, and property tax records.
Step 2: Use this information to calculate your gross income, net income (gross income minus all deductions), and gross profit (gross income minus business expenses).
Step 3: Now that you have all of your financial data organized and recorded, you can begin to consider ways to separate your business finances from your personal finances based on their type and how critical they are to the success of your business.
1) List all the reasons why you want to separate business from personal
Separating business finances from personal finances is one of the most important aspects of any business. This task may be difficult to manage but when you do it well, the benefits are incredible. There are a number of advantages of dividing your finances, including better decision-making abilities, financial freedom, and asset protection. After you read this list of 8 steps to successfully separate your personal finances from your business ones we’re sure you’ll feel more confident about how easy it is!
2) Create two bank accounts
Opening a second bank account for your business is the first step in separating your personal finances from your company. But you don’t need to open an account at the same bank. You can find different banks with low-interest rates, free checking, and other perks that might better suit you. Once you choose a new bank, transfer any funds from your personal checking account into this new business account so that it’s ready when you start spending money on projects.
3) Make sure only you have access to both accounts
- Set up a business account with your bank. With this account, you can deposit your earnings and the funds will be separate from personal money.
- Open a savings account, preferably in the same bank as your business account, with which you can deposit personal funds such as loans or gifts that you need for living expenses until they are used up.
- Open a credit card if you haven’t already done so – one that can be used only for business purposes such as buying office supplies or advertising on social media sites like Facebook or Twitter.
4) Set up an automatic transfer each month
One of the easiest ways to separate your business finances from your personal finances is by setting up an automatic transfer each month. You can do this on either side: If you want to ensure that your business has money while you are in a meeting, set up a schedule to make sure that money transfers out of your checking account at certain times. If you want things the other way around, set up a scheduled deposit each month into your business account with the amount coming out of what you have budgeted for yourself. Either way, this is a simple but effective way to keep your personal accounts separate from your business accounts.
5) Have a plan in place if something goes wrong
In the unfortunate event that something does go wrong, make sure you have a plan in place. Has someone been designated to pick up your children from school in the event of an emergency? Have you appointed someone trustworthy with power of attorney? Are your will and estate set up so that it’s not a burden on your family when you die? These are all things you can take care of before they’re needed, ensuring everything is taken care of the way you want it.
6) Track your progress
I have separated 11 steps for separating business finances as follows:
- File a federal tax return (personal)
- File a federal tax return (business)
- Establish a financial system that’s based on the businesses’ categories and not individual accounts, e.g., put business expenses in the appropriate category when paid, input them into the expense account at year-end
7) Report your success, especially early on
Some entrepreneurs like to keep their personal and business finances very separate, while others like to mix the two together. I prefer the second option. It makes it easier for me because my business income is all taxed at a lower level than normal income. Here are 8 steps that you can use in order to successfully separate your business and personal finances:
1) Open up a savings account specifically for your company funds. Make sure you label it clearly with your company name.
2) Transfer funds that belong to your company into this account.
3) Create a spreadsheet of where all your money is going and how much each category costs per month.
4) Calculate how much money you’ll need to cover these expenses next year.
5) Estimate how much of your salary will be needed to cover these expenses as well.
6) Figure out what percentage of profits from your company will go towards taxes (hint: about 30%).
7) Take the percentage from step 6, multiply it by 30% then divide that number by 100%. You should now have an idea of what percentage of profits from your company will go towards taxes (around 33%).
8) Take this percentage number from step 7 and subtract it from 100%. The remainder is the percentage of profit left over after taxes (67% after taxes).
8) Stay positive throughout the process.
Learning how to separate your business finances from your personal finances can be overwhelming but with a bit of planning, determination, and lots of hard work, it is possible.
The first step in successfully separating your business finances from your personal ones is figuring out which category belongs where. When you think about it, many expenses fall into one category or the other so this should be pretty easy. Utilities, groceries, and gas, for example, would fall under personal expenses while utilities, office supplies, and printing/binding would be business related. This also means that once you have figured out where each expense goes it will become easier to tell which bills need attention right away.
The next step is determining what type of records you will need to keep on your business expenses.