A lot of people daydream about starting their own business. But if you launch a company and debts pile up or an irate customer decides to sue you, you could wind up declaring bankruptcy and other fun stuff. There’s a simple way to prevent your business from destroying your personal income, of course: Keep your business and personal expenses and records separate.
But if you’re bootstrapping a business with your personal bank account, and especially if you don’t have a lot of the green stuff, you know that can be much more complicated than it sounds.
Still, you want to keep your personal income as far away as your business revenue as possible. How? Here’s some advice from a few entrepreneurs and business experts.
Keep a separate bank account for your company. Opening a business account at your bank is best, but “at a minimum, open a separate personal account and run income and expenses through this,” says Holly Isdale, who owns Wealthaven, a financial planning and consulting firm, and splits her time between New York City and Bryn Mawr, Pennsylvania.
She adds that if you’re spending money on multiple businesses or ideas for businesses, you might want to consider separate accounts for each. “Not only does it provide a good way to track income and expenses for the activity, but it also allows you to keep different ideas separate, which is helpful if you end up getting collaborators, investors or partners at some point down the road.”
[Read: 10 Do’s and Don’ts When Launching a Business.]
Most people will need one business account, and they need to keep a separate personal account for a variety of reasons, says Don Mercer, a senior vice president of the small business group at Bank of the West, headquartered in San Francisco. The main reasons, he says, are:
- Simplicity. “It’s much easier to track and follow your business expenses in one account rather than having to reconcile across multiple accounts,” Mercer says.
- Refinancing a loan. Say you’ve bought a lot of equipment on a credit card for your business, and you can’t pay it off, so you’d like to refinance for a more favorable long-term loan. “The lender would want to know that the debt they are refinancing has been used for business purposes,” Mercer says. “That’s difficult to do if you pay for business supplies on that card in the morning and the movie tickets for the family that night.”
- The documentation will make it easier to bring in an investor. If your business takes off, you may need more money, quickly, to hire an employee or buy more inventory. “Whether that investor is a family member, a partner or a bank, they are all going to want to know that the investment opportunity you are giving them is both smart and sound … The evidence you will be asked to provide are the very financials you established when you started your business to measure your success and profitability,” Mercer says.
But if your accounts show business expenses mixed in with movie tickets and other personal purchases, you won’t look like a serious businessperson to anyone who sees your records – even if you are or aspire to be.
Consider hiring a professional. You don’t have to hire someone full time, especially if you can’t even pay yourself yet. But “hiring a bookkeeper who works a few hours a month is a big help,” says Noah Chaimberg, who last October launched heatonist.com, which offers a line of gourmet hot sauces.
Through a referral, Chaimberg hired a bookkeeper in February to get help with his taxes. “It was really important to me that I could find someone I could trust. In my past jobs, I’ve had teams of people to track budgets and spending and take care of paperwork,” says Chaimberg, 31, who lives in Brooklyn, N.Y., and previously worked in digital marketing. The finances of his business started to overtake his time, and regardless, “I realized that I didn’t have a grip on the finances,” he says.
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