It’s as easy as an LLC: Why separating business and personal expenses is essential

Business owners may feel like the distinction between business and personal has become increasingly blurred these days, but one thing’s certain — the IRS doesn’t see things that way. As a small business owner, separating your personal wealth from your business finances is essential. Doing so not only helps when tax time rolls around but also protects your personal expenses from any business challenges that may occur.
 
Wherever you are in your business journey, take some time to enlist the following financial securities. These will keep your personal wealth separate from your business wealth.

Form an LLC or a Corporation

Forming an LLC or a Corporation for your business allows you to portray your business more professionally. Doing so has favorable tax consequences and helps ensure that your personal wealth remains separated from business liabilities. Some of the main differences between the two are listed below, but speak with a tax professional before deciding which is best for you:

• LLC: An LLC has one or more individual members, and there tends to be less formal record-keeping and reporting requirements.[1] As far as taxes go, the IRS treats LLCs like a sole proprietorship or partnership, and all profit and losses “pass-through” the business to the owners, meaning you’ll report this information on your personal tax return. LLCs don’t pay federal income taxes, but some states do charge annual taxes on LLCs.[2]
• Corporation: Corporations have shareholders (as opposed to individual members), and they tend to have more formal record-keeping and reporting requirements.[3] For tax purposes, the profit of a corporation is taxed directly, and then the shareholders are taxed again when they receive compensation. This means corporations are taxed twice, which is something to consider when it comes to which is best for your needs.[4]

Get liability insurance

One of the most important insurance policies a small business owner should investigate is liability insurance. Generally, this policy helps safeguard the business owner’s personal property by covering the cost of any injury and/or property damage claims against the business. The policy also covers the cost of medical care, repairing or replacing damaged property, and any additional legal fees incurred due to a covered claim.

Most liability insurance policies offer extended coverage for an additional cost. This might cover things like product failures or data breaches, as well. [5]

Get a business credit/debit card for business expenses

One of the easiest things you can do — for both tax purposes and for general bookkeeping needs — is to get a credit and debit card that ties to your business directly. Using these cards for business expenses only is an easy way to keep track of your business expenses for your own knowledge, as well as for tax filing and reporting any necessary deductions.

The right business credit card may also offer additional, business-specific benefits like welcome bonuses and cash back on the business products you purchase the most.

Take out a loan

Rather than using your own savings to fund your business, consider finding a low-cost, reasonable business loan to fund your corporate needs. With Valley’s SBA 7(a) loan for business acquisition, for example, you’ll get attractive interest rates, longer loan terms, and plenty of working capital to help grow your business, among other things.

The previous tips can help you keep the separation between your personal and business wealth as you manage your small business. For any additional business needs, consider consulting with a business manager and/or a certified public accountant or tax attorney who specializes in small businesses.