The 2020 pandemic changed so much about our daily lives and especially our work lives. Because of COVID-19, when people did start to go back to work, things were very different. Coming into the office was no longer a daily requirement. Meeting with clients in person transformed into video calling. Working from home became the new normal. Many people even took the opportunity to start their own business.
It’s harder than ever to delineate personal and business finances when it’s all occurring simultaneously. Taking the extra time to separate your finances will make your year-end accounting much easier and benefit you in the long term.
Protection from Liability
If you’ve started a business but haven’t clearly separated it from your personal finances, you could be personally liable in any potential lawsuits. For instance, your home, your savings, all your personal assets could be seized if your business is not formally filed and your accounts clearly separated. You’ll need to decide what type of business makes the most sense and file the appropriate paperwork (LLC, sole proprietorship, partnership, corporation, etc).
Protection from Bankruptcy
Any new business venture is a gamble and even the most successful businesses can stumble. Sometimes a business has no choice but to declare bankruptcy, as many had to this year. Depending on the type of bankruptcy, the business assets may be seized and sold to pay off outstanding debts. If your personal assets are tied up in the business, you could be facing financial ruin.
Avoiding an Audit
One of the major red flags to an IRS agent is a high amount of tax write-offs. Are you deducting personal expenses on your business tax return? Maybe you’re deducting a home office (when you also have outside office space) or you’re taking a high mileage deduction when most of your travel is personal. Take the time now to file your receipts as either personal or business. Use a dedicated credit card and bank account registered with the business name. Separate and track your expenses. You’ll save money by not having to pay exorbitant IRS fines and not having your accountants work overtime to compile audit paperwork.
Building the Business
One of the first steps of creating a business is securing a business loan. Many people use personal credit in this endeavor. As the business makes the loan payments, you’ll see the business credit score improve. The business may need additional loans to grow through making purchase orders, hiring staff, opening additional locations, etc. If you keep using personal credit to secure loans, the business credit will not improve meaning it will continue to remain a risk to investors.
The experts at Halter CPA can help you through the process of separating your business from your personal accounts no matter how entangled they’ve become.