Many freelancers don’t treat their work as a business. But in the eyes of the law (and the tax man), anyone working for themselves is in business for themselves. That’s why it’s vital that every business, from freelance writer to Uber Driver to Etsy seller, keeps business and personal finances separate.
This sounds simple, but sometimes, the two become so entangled it becomes hard to see where one ends and the other begins. This is especially true for those who work from home, where utility bills often include business and household expenses.
So the question is, how do I untangle them, and why does this even matter in the first place?
Why Do I Need to Separate My Business & Personal Finances?
You Might be Paying Too Much Tax
When you’re a consultant or freelancer with little overhead, you may not realize how much your expenses add up. Those expenses are often tax-deductible, and if you’re not keeping track of them you’re missing a big opportunity to pay less tax. Here are some expenses you can deduct from your taxes that may be lurking in your household bills:
- Mortgage or rent (a percentage for your home office)
- Cell phone
- Transportation-related expenses (gas, mileage, public transportation)
- Meals & entertainment (business-related)
You May Lose Personal Asset Protection
Even if your business is legally separated from your personal assets in the form of a corporation or Limited Liability Company (LLC), if you’re sued you may suffer financially if your business doesn’t have it’s own chequing account.
It Will Be Harder to Establish Business Credit
When you need to borrow money for your business, most lenders won’t give it to you because it will be hard for them to determine how the money’s going to be used. That’s why it’s critical to open separate business bank accounts that are only used for business transactions.
Business & Personal Finance Separation Tips
Create a Separate Legal Structure for Your Business
If you’re operating as a sole propietor or partnership, keep in mind that you have no personal asset protection. This means that if something happens and a client sues you, they can take your house and personal property.
By forming a corporation or LLC, your business becomes a separate legal entity in the eyes of the law. That means that your business assets will be separate from your personal assets. But it also means that you’ll be required to keep detailed financial records that are almost impossible to provide without having separate bank accounts.
If you’re a Canadian small business owner, there are different registration processes for different provinces—so make sure you find the right steps for your provincial incorporation.
Open a Business Chequing and Savings Account
Seems like a no brainer, right? Not so fast. If you’re a part-time business owner with a full-time job, opening a separate bank account for your side hustle may not seem like it’s fully necessary at this point. As your part-time business grows into a full-time business, your expenses and income may become too difficult to track separately inside your personal bank account. That’s a full-time headache.
Pay Yourself a Salary
Instead of using your business bank account to pay for personal expenses and writing it off as your salary, why not transfer a set amount of money each month into your personal bank account?
Paying yourself a salary (or choosing not to take one at all) not only gives you an idea of your income, but also makes it easier for you to reinvest money back into the business to help it grow.
Keep Detailed Records for Business Use of Personal Assets
If you’re using your car for your business and don’t want to buy a separate company vehicle, be sure to keep detailed logs of your mileage, and save all your gas receipts. You can write mileage off on your taxes, as well as gas purchased for business use of your personal vehicle.
Use Accounting Software
Of course, we at Kashoo are crazy about accounting software. And studies show 88% of small businesses already use it. By connecting your bank account directly with Kashoo, you can easily manage all your income and expenses.
But when you’re using your bank account for both business and personal reasons, it can get very time consuming because you have to exclude every personal transaction in order to balance your books properly.
This can create nightmares for your accountant. Keeping everything separate means less headaches and lower accounting fees.
The Bottom Line
Even if you’re making very little income in your business and your expenses are low, make things easier on yourself by untangling your personal finances from your business now. Otherwise, it’ll be a total nightmare to do it later.
And if you’re in the market for accounting software, check out Kashoo. Our user-friendly interface and unlimited support make it the best deal for your money.