Well, whether or not we’re headed for a recession is still in question. I’m sure you have your opinions on the matter. We’ll see how the Fed’s interest rate hikes (including the final one expected this week) have impacted things economically. Keep an eye on the Q2 earnings for big A-list corporations (like Mcdonald’s and Exxon) set to release this week. Their performance will be a helpful indicator of just how effective inflation-slowing efforts have been and if we’ll see the economic ship right itself.
While we keep our attention on that, I also want you to remember to not let it consume you. Changes in the economy may allow for some creative thinking and more laterally-minded measures. It may be an opportunity to evaluate some of your business habits.
One area that you might not have considered is your system for keeping business and personal expenses separate.
Because it’s easy as a business owner if you don’t have a (good) system in place, to blur the lines here. Believe me, we have seen plenty of people come to us whose books are a mess, which complicates operations unnecessarily. That’s why I’m bringing it up.
Let’s talk a bit about about WHY it’s so important for you.
Keeping Expenses Separate in Your Montgomery County and Tri-state area Business
When you started your Montgomery County and Tri-state area business, I’m sure you felt that sugar high that comes with it. You have this idea that’s been percolating in your mind for months, maybe even years… and now you finally get to open the doors, make the announcement, close your first sale…
It’s such an exciting (and hectic) time that many small-business owners (especially new ones) easily forget one basic fact about having your own company: Keep the money separate.
If we’re honest, treating your business’s money as your personal account (or vice-versa) is so easy to do: depositing a client’s fee paid to your business into your personal bank account, dipping into your business account to pay a personal expense, and not keeping the records because you know where the money went, and everything is doing fine.
The harm comes in the recordkeeping, though… because you might depend on it later to keep your company’s doors open. Here’s how.
A caution against commingling
If you’re properly in business, having two pots of money confuses your accounting. And accounting is what you’re going to need first and most obviously to determine your company’s strengths and weaknesses, aka profits and losses down the road.
Separating expenses can also be for your own good if you’ve incorporated them. If — heaven forbid — your company goes bankrupt someday, one avenue that creditors will have to your personal money will be if your business and personal finances were intertwined (piercing what’s called your “corporate veil”).
If you’re a sole proprietor, do yourself a favor and look into becoming a limited liability company (LLC), which can offer you some protection from the fallout of debt.
You’ll also need a proper audit trail to prove the deductions and losses you take (and believe me, you’ll need those in the first few years) on your business tax return.
While we’re on taxes, if you’ve got even a small online business, this could be the first year you get an IRS Form 1099. For tax year 2023, if you use a third-party payment platform like Venmo or PayPal or sell on sites like Etsy or eBay and make just $600, you and the IRS will get a Form 1099-K in January 2024.
If you use a payment platform for personal payments, you won’t get a 1099-K – but there’s no guarantee that mistakes won’t be made in this initial year of the 1099 blizzards.
You’re probably beginning to see how keeping good records and separating funds will be especially helpful.
The nitty gritty
Bank accounts: From the minute you turn on the lights, get a proper business account that’s completely distinct from your personal accounts. To open a biz account, you’ll need to get a federal tax ID number (EIN) and a state tax ID number, as well as any documents you filed for when you formed your company such as articles of incorporation or a certificate of formation.
Business accounts typically give you checking, savings, credit card accounts, and a merchant services account that allow credit and debit card transactions from customers. Other perks should include multiple credit cards for you and your employees (more on that in a sec) and merchant services that keep customers’ personal info secure. You’ll probably get a line-of-credit option for your company larger than what you’d get in a personal account.
Credit cards: Getting a business credit card separate from your personal plastic is just as important as having a distinct bank account. It’ll be instrumental in creating the paper trail needed to justify deductible expenses that you take on your business tax return.
Application and approval is a similar process to that of personal cards. Go into it knowing your credit score and history. Be prepared with your written business plan, profit and loss statements, and other financial records from any previous business you had.
What function is the card going to have in your company? Narrow this to just a few details — for instance, cash flow, international use, multiple employees using the card, and rewards points that match your company’s buying patterns — and match the card’s plusses to those.
Untangling a mess
It’s never too late to begin untangling business and personal finances.
Go back through your records (with luck, your company is still young enough so you won’t have to look at too many years). Pick out the transactions you know are business or personal. Pay special attention to meals and travel, vehicle expenses, and home-office costs — the IRS likes to attack these ones.
So whether your Montgomery County and Tri-state area small business venture is just taking flight, or there have been a few messes along the way that you’d like to clean up, always feel free to reach out to us.
Your Staff at CAS