Corporation, LLC, Sole-Proprietor

SEPARATING YOUR BUSINESS AND PERSONAL FINANCES

The first set of steps for any business entity should be to create clear separation between your business and your personal finances.   My  experience as a CPA representing clients on IRS audits for over 30 years has shown me time and time again that when there is no clear separation, audit results are not as good.  

The first step is to clearly establish an independent entity from yourself. This can be a sole proprietorship or a single member LLC, or even more separation with an S Corporation, Corporation, or multi-member LLC. These entities generally require you to obtain a federal identification number (EIN) for tax reporting purposes. 

After you have established the business legal structure you can obtain a business license in the city in which you do business. This allows you to operate in that particular city. If you need to file a fictitious name for your business, this is usually done at the county level by paying a fee, and publishing this information for a period of time.

 Create bank accounts using the business name, and federal ID number. Begin business activity by having deposits, and expenditures go through your business operating account. If you are establishing merchant accounts, and other PayPal type accounts, always use your business name and federal ID number for tax recording. As best you can, utilize your business banking for your business related activities, and your personal banking for your personal activities. This will generally require that you either transfer funds, or write a check from your business to your personal to be able to pay your personal bills. This is absolutely normal and expected.

Implement a dedicated accounting system for your business by separating how and where you account for your personal expenditures. There are a variety of programs at different levels to use depending on your industry and needs. Many of these software programs allow your accountant to also log in to supervise the entries and postings, reconcile the system, and produce proper reports. These programs can also be helpful in administrating sales tax, payroll, and payroll tax functions.

Establish separate business credit from your personal credit as best you can by starting with credit cards in your company name and federal ID number. Having a credit card that is a different color for your business then your personal credit card is recommended. You will have the best luck identifying which one needs to be used as you are quickly reaching into your wallet or purse. The next level of business credit to obtain is equipment loans, and vehicle loans. The last and generally the largest is the business line of credit.

Utilize a method of reimbursement for the occasional time when you mix up a purchase or expenditure on either your business or personal account to maintain the clarity of your business activities, and for the accounting to also include the information as well. 

By using these simple guidelines, you’ll find, in creating a business specific environment for you to operate, both separation and clarity between your business and your personal finances.

Steven Z. Freeman, CPA and the staff at Freeman and Associates provides Business Services, Tax Planning, Entity Formation plus Maintenance, and Accounting Services and can assist you with these services. If you have any questions on this matter, or to schedule an initial consultation,

Please contact us at (805) 495-4211 or Steve@FreemanAssoc.net

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