Running a small business has advantages, but there are also several things to watch out for if you are a sole proprietor. One of the potential pitfalls of sharing an identity with your small business is allowing your personal finances to become entangled with those of your company. While this may not raise any legal issues (depending on how your business is organized), it can be a nightmare at tax time. It is also difficult to keep track of how profitable you are (or aren’t) when everything is thrown together. Taking a few quick steps to separate your finances when you first set up your business can save you time and mental energy later.
Open a Separate Account
Check with your local bank to see if they have any free or low-fee checking accounts for small business owners. You may find that you don’t need an official business account and can open a separate personal account for your business. This depends on how your company is registered, so check the laws where you live. Be sure that the name on your new account matches the name on your invoice templates so you won’t have any problems getting client payments posted to your account. Whatever it takes, open that separate checking account and link it with your free billing software and estimates app. If you plan on using a personal credit card for some of your business expenses, dedicate that card to business use only.
Multiple Accounts for Multiple Businesses
If you own more than one business, you need more than one business bank account. This is true even if you are a sole proprietor and will be filing all your income taxes on the same return. You will need to file a separate Schedule C for each business, listing income, expenses and deductions, so have them separated from the beginning is the smart way to go. Taking a day or two to get organized now will pay off at tax time.