As an entrepreneur, your business and personal life may seem like one and the same. However, separating your personal and business finances is essential to successful money management now and as your company grows. “When it comes time to file your taxes, combining personal and business finances makes it a more difficult and longer process, and you run the risk of error,” cautions Robyn Pangman, a Chartered Professional Accountant (CPA) based in Oakville, Ont. Here’s how to draw the line between your money and that of your company.
Starting up? Start a new account. Many entrepreneurs have no choice but to use personal funds to support a burgeoning company, but it’s still important to separate out the cash you intend to use for your business. Creating a clear delineation between your finances and those of your business makes it much easier to track your earnings, and can provide helpful documentation should you ever experience financial difficulties.
Earmark the sum you’ll need to finance your start-up in the beginning, and transfer the funds from your personal account into a newly created bank account. “Then you’ll see the transfer from personal into business, and all the business transactions will be occurring in one place,” Pangman says.
If your bank is hesitant to let you open a business account when you’re just starting out, a separate personal chequing account will work just fine for this purpose.
Apply for a business credit card. “If you’re looking through a year’s worth of credit card statements that have both your personal and corporate expenses intermingled, it’s going to be a challenging exercise to separate them and there’s room for mistakes,” Pangman warns. For example, you may miss recording a business expense that could result in a write-off for you come tax time. Keeping business expenses on a separate card will help you clearly track your spending and maintain your budget. Plus, interest on a company card is deductible as a business expense.
Keep accurate records. “You might be able to review all your bank statements at the end of the year, but you might not remember which expenses were business and which ones were personal,” Pangman says. To avoid missing deductions, she recommends that all independent business owners set up a separate filing system in which to keep all business-related receipts and documents. Keep receipts organized in categories, such as meals and entertainment, office expenses, invoices, etc., and make notes on each detailing what the expense was for.
Meet with an accountant. No matter what stage your business is at, it’s a good idea to do some financial planning with a professional. “You definitely want to talk to your accountant about what deductions are available to you,” Pangman advises. An accountant may also be able to set you up with bookkeeping templates, and give you accurate information on what documentation you need for tax filing.
The bottom line: separating out business and personal finances will make your life simpler in the short term, and will help as you expand or even sell your business in the future.