Easy Ways for Sole Proprietors to Separate Finances
If you operate a business as a sole proprietorship, you may have less paperwork to file than under other tax structures. However, it is beneficial to separate business and personal finances to maximize revenue and ensure the long-term financial health not only of your business, but your personal finances.
The benefits of a sole proprietorship
A sole proprietorship is one of the most common small business structures. It is defined as an unincorporated business with just one owner who runs the business without any legal or tax separation between the business and the owner. Under this structure, a sole proprietor runs the business as an individual and reports profits or losses on their individual tax return.
For many new entrepreneurs, sole proprietorship may seem like an easy way to get started. However, it’s important to implement expense management practices that can help keep the finances separate.
Separating business and personal finances
Separating your business and personal finances can help your business establish more legitimacy. For example, having customers pay your business rather than you personally can help project a degree of professionalism.
Finally, it will also help you better forecast the profitability of the business and your income. Deciphering between these two metrics may prove difficult if all business expenses and revenue are paid and received via personal accounts. Clearly defining what is for personal use and business use may help with ongoing cash-flow tracking and year-end reports.
How to separate business and personal finances
There are a few ways for sole proprietors to separate business and personal finances, which may help boost business revenue.
- Keep separate bank accounts. A separate account can make it easier to track expenses and helps establish legitimacy for your business.
- Consider opening a business credit card. Having a credit card just for your business can help you avoid the temptation of using a personal credit card for business expenses. It can also help you build credit history in your business name. And if you use the card regularly, it will be easy to track business expenses.
- Separate your receipts. Create a system for filing business receipts that’s separate from where you file personal receipts. If you have an organized system, you’ll have an easier time preparing to file taxes each year. With efficient organization, you can more easily identify potential business tax deductions.
Track business cash flow and expenses
When you keep business and personal finances separate, you’re better able to track business expenses and cash flow trends, which can help you in making informed decisions for the future of your business.
Get a quick picture of your business finances—money in, money out—when you link your business accounts to cash-flow management tools. Use this free data analytics, based on your linked accounts, to anticipate cash flow ups and downs—and identify opportunities that could help you grow your business.