As a small-business owner, it may feel like you and your business are one and the same. And in many ways, you are. But there should be a clear distinction between your business and personal finances — no matter what size your business.
Why should I separate my business and personal finances?
From a business perspective, having separate financials means that you’ll get a clearer picture of whether or not your business is profitable. From a tax perspective, your dealings with the Internal Revenue Service will be much more straightforward. Your personal expenses are not deductible, so having them co-mingled with your business expenses will make it all the more difficult to compile your tax return. Your business is also more likely to be audited or to be considered a “hobby” (for which the IRS is quick to deny deductions and losses) if you are mixing business and personal funds.
Should I pay myself?
Yes! It’s essential to understand that the owner’s salary must be built into the business budget or projections. Determine how much money you need to earn from your business, and include that amount as one of your fixed expenses. “Breaking even” must include paying yourself — or your business won’t be sustainable.
How do I pay myself?
This depends on your legal structure. If you’re a sole proprietor, you will do an owner’s draw. If you have an S Corporation, you’ll get a payroll check. And if you have an Limited Liability Corporation, the way you pay yourself depends on whether you’re being taxed as a sole proprietor or an S-Corp. Confused? Your accountant can advise you on what’s best for your business.
Candy Williams is a business developer at Mountain BizWorks, and a certified QuickBooks Pro Advisor with more than 20 years of bookkeeping experience. To learn more about managing your business finances, register for her Tuesday, Oct. 16, class — “Financial Tools for Your Business Using QuickBooks” — by contacting Victor at 253-2834, ext. 23, or firstname.lastname@example.org.
Mountain BizWorks supports small businesses in Western North Carolina through lending, consulting and training. For more information, visit mountainbizworks.org.