All too often, businesses owners mix up and intertwine personal and work-related expenditures. If you’re passionate, sometimes your personal life can be your business and it’s easy to get the two mixed up.
Not keeping track of your finances however could lead to a messy and lengthy tax bill, so make sure you keep on top of finances in order to run your business efficiently.
It’s very important to separate the money that relates to your personal and business accounts, especially if you’re just starting out. Your business should be treated as a separate being, and should be managed as such too.
Manage Separate Accounts
Your bank is the best place to distinguish between your personal and business finances. Business accounts have access to special interest rates compared to standard accounts, so make sure all income and expenditures such as buying stock or buying shares, go through the designated bank account.
Having two accounts will also improve your organisation. At the end of a very busy year, the last thing you want is for all your accounts to be a mess. By keeping a watchful eye on your personal and business finances, you’ll be able to complete tax returns easier, and you’ll be able to identify any problems easier.
Finally, if you get audited, you’ll be able to prove any red flags! In reality, you should consider having a separate bank account for your business to be absolutely essential if you run a formal company, compared to operating as a simple sole trader. From a legal perspective, you need to have a clear and unambiguous way to be able to report your business expenses and income without getting tangled up with personal transactions.
Use a Business Credit Card
Although small businesses have quite a few strict lending requirements, its best to get a business credit card in order to help you keep track of personal and business spending. Again, if you’re audited, you’ll be able to produce statements showing the business account and credit card that’s linked to it. Furthermore, business cards can get you extra tax deductions too. For example, if you need to carry over a credit card balance to another account, the interest is tax deductible.
Change Your Type of Business
Why not change the way your business operates, for example establishing a Limited Liability Company (Ltd)? Make sure you meet with your financers, solicitors and business partners to determine what type of company makes the most sense. There are a range of ways you can run your company, and different business entities have different tax reliefs and insurance coverage. Your personal finances will also get a liability boost, which could help if your business is ever sued.
Tax Returns
There is a variety of web based accounting software available to help keep your business and personal finances separate. When it comes to filling out your tax return, you’ll want to be as precise as possible.
You’ll be able to show the tax man what you’ve spent, where it’s been spent and whether it’s business or personal.
If you were to file expenses and accidentally deduct some personal expenses from your businesses taxable income, this could be seen as fraudulent. It’s easier to be organised and avoid this risk entirely by separating your business and personal transactions, so that this worry needn’t even cross your mind.