Whether you’re raking in big profits or your business is in its infancy, you must keep your business and personal finances separate—for tax purposes and two other important reasons.
First, in order to grow your company (and not get tripped up by the IRS) you need the ability to accurately report business income and expenses on your tax return. This is hard to do if your finances are co-mingled.
Second, mature businesses pay their owners, and yours should too. Even early on, it's good to start thinking that your business is separate from you, because it is. Someday, maybe now, you’ll want the security of knowing that your personal finances are legally protected.
Third, in the event that you want to seek investors, or take on a partner, it's easier to calculate the value of your business if expenses and income aren't co-mingled.
What are some best practices?
• Separate your business and personal transactions. You can do this by getting different bank accounts for both your business and your personal life. It doesn’t cost anything but an hour at the bank.
• If you can, keep it simple, and have no more than one bank account, and one credit card for business and personal use.
• Get hard copies of your bank statements mailed to you, it’s easier to get them in the mail and file them away, then to remember to download them every month.
• Stay organized. Get a nice box that has either category types or month labels on it. In each category file receipts (such as supplies in the supplies section or meals in the meals section).
• If you don’t want to sort them by category, which can be time consuming, keep it simple and sort by month.
• Keep up to date on your bookkeeping - it’s much easier to stay current on your bookkeeping then it is to go retroactive
• Keep all business-related financial documents on file for at least three years. If you run payroll or have employees you must keep your records for at least five years.
If you are thinking “Ugh, my business is so small this probably doesn’t matter”—not so fast. There are BIG ramifications for not filing accurate tax returns.
If you under report your income, and the IRS finds out about it, you are breaking the law. While you probably won’t get hauled off to jail, the IRS will send you a big, fat retroactive bill for the back taxes you owe, plus penalties, plus interest.
Bottom line: It pays to separate your business and personal taxes as soon as possible.