Whether you’ve just started the exciting venture of establishing your business or looking to organize current and ongoing business activities, there are many factors to keep in mind. One key factor is having a clear distinction between your business and your personal finances, with supporting documentation for any major business expenditures, capitalized costs, loans, or profits earned. Accurate recordkeeping and bookkeeping of all activities related to your business separate from your personal finances will ensure that you abide by the business rules and regulations of the IRS, can reap the benefits of tax deductible items, shield your personal assets, and generally can help in decision-making processes based on the overall financial position of your company.
Capturing Business Transactions from Personal Accounts
Like many promising business owners, at the beginning stage of funding your venture, you might have incurred a lot of start-up expenses and have used your personal assets to essentially establish capital. You might have also taken out start-up loans using your personal credit to assist in funding the launch of your business. Even though you’ve incurred expenses in the initial stage of business development from either your personal checking, savings, or sources of credit, it’s important to capture these as start-up costs in your business’ books. If you have start-up costs amounting to less than $50,000.00, $5,000.00 of it can be fully deducted for the first year that your business is operational, and the remainder can get amortized throughout 15 years. Accurate supporting documentation should be kept to validate that these costs are in fact for your business, so that you can reap full tax deductible benefits.
Even after your business accounts have been set up, you may still be using your personal accounts to assist in the upkeep of some of your business expenditures. Reflecting these expenses as capital contributions to your business ensures that, not only will you be able to take advantage of tax incentives, but that in your due diligence in accurately capturing the contributions you’ve made towards operating your business, your quality recordkeeping will save you stress in the event that you are ever in an IRS audit.
Protection of Personal Assets
For the most part, businesses are considered an independent legal entity in itself. Hence, it is a separate entity from you. Keeping your business finances separate from your personal finances ensures that you are accurately accounting, budgeting, and planning for what is yours separate from what is technically for a whole independent entity. However, in the case that you establish a sole proprietorship, this means that your business is owned and run by you alone. You assume all gains, losses, assets and liabilities – there is no legal distinction between the business and yourself. Because of this, it’s even more important to keep business and personal activities separate in order to protect personal assets from being jeopardized to satisfy creditors.
Set Up Business Accounts
To alleviate the headache of separating individual business and personal expenses, it is best to establish bank or credit card accounts dedicated solely for your business. You will be able to easily identify each type of expense you incur, at what rate you spend on each type of expense, and can easily trace what is your business’ income versus what you’ve contributed as capital injections towards your business. Borrowing from creditors can be easier, in that you will have only one source to pull the necessary income information needed to establish business credit. Establishing a working capital loan can greatly improve the growth of your business, and such loans would need accurate reflection of your overall business health – an accurate financial report to provide such loan providers would not be so easy if your business and personal finances are not segregated.
Ease of Decision-Making Processes
In ensuring you maintain a proper record of all business-related activities, you and your shareholders can form decisions based off the financial position of your company by analyzing accurate financial reports. Budget plans and forecasting models can come into play after having clear distinction between what has played pivotal roles in shaping your business versus what hasn’t. After having a solid recordkeeping structure for capturing all business-related activities, more time and attention can be spent on tactical planning and marketing strategies in pursuit of reeling in new investment opportunities, and in turn can help foster growth for your company.