January 29, 2024 | 6 minute read
Many new entrepreneurs tend to use their personal bank accounts to deposit payments and pay bills for their business. Once a venture is up and running, however, it’s important for business owners to take steps to separate their business and personal finances.
To learn more about the steps to launch a new business, including how to form your business with an exclusive offer from Bizee, you can visit the Bank of America Start a Business Center.
A business’s structure affects the owner’s personal liability. A sole proprietorship is not a separate business entity, and therefore, under this structure, a business owner is still personally responsible for the liabilities and debts of the business. Partnerships, limited liability companies (LLCs) and corporations, on the other hand, all offer varying degrees of personal protection from liability and debt. With an LLC, for instance, “generally no one can come after the owner’s personal assets,” says Chris Wong, head of Small Business Product with Bank of America. To compare them, see the Small Business Administration’s guide to choosing a business structure.
It’s important for a business owner to build their business’s credit history separately from their personal credit history. While lenders may look at a business owner’s individual creditworthiness, they’ll also want to see that the business is in good standing with its creditors. Establishing separate accounts in the business’s name will help to establish the business as a separate entity with its own credit history separate from the business owner’s as an individual.
Separating business and personal finances may help a business owner maintain a clearer picture of their company’s cash flow and financial health apart from their personal assets and liabilities. “A separate business account provides business owners with the ability to manage their business in one central location,” Wong says.
Corporations and LLCs must, by law, keep their business’s finances separate from the owner’s personal accounts. However, even if an owner has opted for another structure, separating business and personal finances may make it easier to maintain good records.
Business accounts — whether checking, savings or debit and credit card accounts — differ greatly from those for personal use. Features may include robust online payment and invoicing capabilities, merchant services and QuickBooks® integration, among others.
Choosing a business structure — whether it be a sole proprietorship, LLC, partnership or corporation — demonstrates that the business is generally a separate legal entity from the owner and dictates how the owner is taxed, the paperwork they need to file, funding options and personal liability. For more information, see the IRS’s overview of the most common business structures.
Many small business owners find it best to seek advice from their accountant and attorney about which legal entity is best for their situation. The entity an owner chooses may affect how much liability protection they have and how much they pay in taxes and other matters.
The procedures for forming a business entity vary based on the type of entity, the nature of the business and the state where the owner legally formed the business. Generally, the business owner must register the entity with any state where they do business through its secretary of state’s office or a business agency. Third-party providers specializing in business formation can also help streamline the process and get owners the documentation they need. Business owners can also work with a legal advisor.
Any business that has employees, files employment or excise tax returns, withholds taxes on nonwage income paid to a nonresident alien or operates as a corporation or partnership (including LLCs treated as partnerships for tax purposes) is required by the IRS to obtain an employer identification number (EIN). An EIN is a unique nine-digit federal tax ID used by the IRS to identify businesses, much like Social Security numbers are used to identify individuals. All official tax documents, forms and paperwork must include that EIN.
The fastest way to apply for an EIN is on the IRS website, though it’s also possible to apply via fax, phone or mail. After the application is completed, the system will generate a new EIN that can be used immediately. Owners generally can apply for an EIN through business formation service providers as well.
Even if a business doesn’t meet these criteria, obtaining an EIN or another business tax ID (such as a state tax ID) may benefit owners anyway. Using a business tax ID instead of a Social Security number can help to establish the business as an entity that is separate from the owner and can help build the business’s individual credit profile.
Setting up a business bank account is one of the most important steps an owner can take to keep the company’s finances separate from their own. When reviewing different banking institutions and account options, owners should consider additional services they might need in the future as the business grows, such as multiple signers, cash flow management tools or merchant services. It’s also important to consider fees for business accounts, which are often different than fees for personal accounts. To find the right type of account that meets specific business needs, owners should compare fees for monthly maintenance as well as features like activity limits, ACH transfers and account bundling opportunities. Owners should also be sure to check the documentation requirements for opening a business bank account.
Using a company credit card, while optional, is another way owners can keep business purchases separate from their personal ones and monitor business expenses. It may also make keeping track of potentially deductible business expenses easier. In addition, using a business credit card responsibly may help an owner build business credit separate from their personal credit. When choosing a card, owners should consider which type would be most beneficial to their business. It may be one with no annual fee or one that offers travel or cash back rewards. Owners may also want to consider their payment habits (will they pay off the balance every month?) and whether they plan to offer cards to employees.
To maintain accurate financial records, small businesses often use accounting software, such as QuickBooks, or hire a professional bookkeeper or accountant to help. The better the records, the easier it will be for owners to assess their company’s financial needs and secure funding.
Getting organized financially can take time, but it will pay off in the long run. By taking it one step at a time, before they know it, business owners will have all of the crucial pieces in place to keep their business and personal finances separate.
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