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How to separate your business and personal finances for success

One of the most common things I see entrepreneurs doing when it comes to their money is comingling their finances.

Comingling: to mix together things of different types

Your business money and your house money are different types of money- they should not be mixed!

This is the most common culprit of why entrepreneurs don't have a good handle on their profitability or why they feel like they are paying themselves when they aren't or why they feel like they can't pay themselves when they can.

By not keeping your business accounts separate from your house accounts, you are enabling yourself to stay "stuck" in playing small. You will not find any six-figure entrepreneur, or honestly, even a high five-figure entrepreneur who is mixing business and house money, it just is not possible to get to that level successfully because you have a skewed reality of your numbers.

I know, I know.

You may be scared to see the reality of your financials.

You may be worried that you won't like what you see and you will be disappointed in what it shows with all the hard work you put in.

But... if you know, you can fix it.

You can't fix a problem you don't even know exists. Right!?!

Comingling, beyond creating skewed financials, can also create legal problems.

If you operate under the umbrella of an LLC and you are mixing funds, you are negating the benefit of the limited liability of protection. Which is the entire point of creating an LLC....

Another legal issue that could arise is if you were to get audited, it could create a situation where the IRS could say your expenses weren't business expenses because there is no clear line between business and personal. So if you go to Starbucks regularly, how can you prove that a Starbucks expense for a business meeting was not actually for you personally... see where I am going here?

Ok, so now that you realize that it is truly necessary for you to have separate business and house accounts and financial records, let's talk about how you go about doing this after so much time of not doing it.

If you don't already have an LLC for your business, that is the first step I recommend.

This allows much more flexibility in how you are taxed as your business grows and shows the intent of a serious entrepreneur. If it is just you in business and you don't have a business partner, this initial step may not require an attorney or even a site such as LegalZoom.

The second thing I suggest is to get an EIN if you don't have one yet. This provides a layer of protection from identity theft. As an entrepreneur, you are giving your SSN or EIN to many people every year. An EIN is not tied to you personally in the way of personal debt and credit, so can keep another layer of separation between your personal finances and the business finances.

Once you have those two completed, contact your banker and open a business checking account and a savings account if you would like also. I personally love credit unions for small business banking.

Once you have your business checking account open, start working with your payment processor (Stripe, PayPal, etc.) to have your account shifted over to your EIN and away from your SSN and to have your deposits begin to go into your business checking account.

At this point, you may be white-knuckling your phone as you read this thinking, but what if I don't make much yet, I am really just ramping up and I am worried my income won't cover my expenses.

IF that is the case, you have been using personal money to pay for your business anyways, and you can still do that... with a transfer from your house account to your business account so you have a paper trail of contributing to your business finances.

If you have been using a credit card for both business and personal, start to identify which card you want to use for business vs which one you want to use personally. If you have one that has really great rewards bonuses, use it where you spend more money on it to maximize the benefits. (Be aware of paying it off timely and your interest rates.)

If you don't have a credit card you can allocate fully to your business, then you can look into getting a new card strictly for your business if you want to go that route.

Now that you have separate bank and credit card accounts, start to identify which expense vendors you need to provide updated card or bank account info to for your payments. You will want to do this as quickly as you can so that within a month or so you have clean accounts with everything where it is meant to be.

At this time, you have separated everything out and you can start to see the reality of your financial situation on both sides, taking the proper steps to improve it across the board or celebrate that you are doing better than you realized.

If you know someone who is getting ready to jump into the world of being an entrepreneur, share this with them and help them be a step ahead of those that were never told this when they started their journey.

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