Blurred lines might be great in abstract art, but they should have no place in how you deal with your company’s finances. While the idea of trudging to the bank to open another account for your retail enterprise might seem like a superfluous waste of time, it is crucial that you maintain strict boundaries between your personal and business finances. Once you understand why this is the case and how you can effectively compartmentalize the two, you can run your retail operation more smoothly and securely.
The benefits of separation.
One of the most important differences between your personal and business accounts is leverage. When setting up and running your store, you will probably need to borrow capital from investors; this is a very standard practice. However, it is less positively viewed in your personal dealings where minimizing extensive borrowing is generally the best idea.
As a business owner, you want to do all you can to establish your credibility. That should mean opening separate credit cards and checking accounts to cement your identity as a legitimate operation. Vendors may feel wary, for instance, if you pay for your office supplies using a personal check or credit card.
Additionally, it makes sense for your documents to be separate for tax reasons. When it comes time to settle with Uncle Sam, all of your company’s records should be far away from your personal ones, enabling you to claim the deductions and write-offs you are entitled to. Should you ever be audited, you’ll be required to produce distinct documentation that covers only the financial activities of your business. Combining accounts can lead to confusion, inaccuracies, and even significant monetary penalties.
Furthermore, maintaining accurate financial records is essential when the time comes to ask lenders for money, or when attempting to raise your company’s business credit score. If everything is mixed together in a disorganized hodge-podge, you won’t be able to provide an accurate business income figure and may be turned down for the loan you are counting on.
How to keep your personal and business finances separate.
Now that you understand the importance of maintaining a healthy divide between your private and business finances, you might be wondering just how to accomplish the task. Follow these helpful guidelines:
• Hire a certified personal accountant (CPA). This highly-qualified individual is worth their weight in gold as they will help you to navigate through the monetary complexities of running your retail operation, including the intricacies of payment processing for businesses.
• Open a separate business account and credit card to boost your legitimacy and raise your credit score.
• Determine the legal structure of your business. Decide if it should be set up as a sole proprietorship, a corporation, or an LLC. Note that setting up your business as an LLC, also known as a limited liability company, will afford you added legal protection, as well as some tax advantages. Having said that, consult your CPA and an attorney to determine what is best for your particular business.
• Pay yourself a regular salary. This leads to more scrupulous budgeting practices.
• Get an employee identification number. This is like a Social Security number for your business that you can use when opening company accounts, filing taxes, or doing other work-related activities.
Perhaps the most important way to maintain that all-important distance between your personal and business finances is to spread the word to your employees and investors. When everyone understands and follows your practices, you can breathe easier knowing that no intermingling is taking place. Bottom line: If you want blurred lines, go to a modern art museum. When it comes to running your business, sharp boundaries are the order of the day.
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