As a small business owner it can be easy to intertwine business and personal finances, but keeping the two apart is vital. To build long-term financial growth and keep track of ongoing expenses and taxes, making sure your business and personal capital are separate is essential.
While as a growing small business it is tempting to save on as many costs as possible by claiming tax deductions, failing to see the difference between personal and business expenses could see you facing an audit or other legal consequences.
Here’s how to keep your personal cash away from your business finances.
Use Separate Accounts
It seems like a no-brainer, but having two different accounts for your personal and business finances is fundamental. Even for those in the early stages of their business who see it as a one-man-shop, it’s all the more important to track business and personal incomings and outgoings separately, or risk facing a headache at tax time.
Also, if you use accounting software , make sure you also have two separate systems for your personal and business financial activity.
Keeping clear records all year long will provide you with proof of your business expenses in case the Australian Tax Office (ATO) queries any claims or you are audited.
Have a Business Credit Card
When it comes to buying stationery for the office or paying for transport to meetings, having a work credit card at the ready will help you separate your business financial activity from your personal purchases.
No matter how big or small the expense, it’s important to keep your business finances on the company card so you can easily track them later. Having a business credit card will also help your business build up its credit score.
Create a Legal Entity
Establishing a separate legal entity for your business is a key way to protect your personal liability and private funds. In Australia, the four common business structures used by small businesses are sole trader, company, partnership and trust.
Your business structure will determine how much tax you pay, your responsibilities as a business owner and what your ongoing costs will be.
Read more about business structures: How to Choose the Right Business Structure in Australia.
Set Yourself a Salary
Whether it’s just you running the business or you manage a small team of employees, don’t forget to set your own salary – and don’t scrimp on it. Paying yourself the same weekly, fortnightly or monthly wage from your business account will make it easier for you to stay on track with both your personal and business finances.
Also, a set salary means you will avoid dipping into the business account for personal expenses, which can make reporting expenses difficult. On the flipside, you should also set a budget for your business – and be conservative about what it can and can’t afford.
Having a budget means you won’t find yourself pumping money into the business account from your own personal funds when there’s a company shortfall.
When the Two Collide
There may be instances where you have expenses that could be classified as both business and personal use. For example, if you work from home you might have one fixed phone line for both business and personal use.
In this case, you need to work out how much of the expense is personal and how much is business, as you can only claim a deduction for the amount related to business use. If you can, it’s best to have a work mobile phone with a business plan to make things clear cut.
Lastly, don’t be tempted to write off entertainment or dinner expenses as a tax deduction that are not work-related. Eating out with friends or family is not a business expense, so it’s best to keep it clean.