Paying Yourself Through Your Business: Separation is Key

by Lindsey on March 9, 2011

There are two main reasons you would start a corporation: tax deduction advantages and liability protection.

You need to pay yourself out of your company so you can cover personal expenses, but if you do this wrong you can kill the very reasons you set up the company in the first place.

First, you need to maintain separation of your business and personal income and expenses.  This may seem like it’s just an extra step, but it is very important.

When you get paid for something your business does, you should have the checks made out to the business name, and deposit them into a bank account that is opened under the business name and tax ID number.  Even if you then turn right around and write yourself a check from the business account and deposit it into your personal account, it needs to go through the proper progression.  This is important if the IRS was ever to look at your financial records in an audit.

The same rule applies to expenses.  Things that are directly related to your business need to be purchased out of your business bank account.  Things that are personal need to be purchased out of your personal bank account.  So, like we talked about in the progression above: say you have to buy groceries and you have a check made out to your business.  Although you could cash the check and buy the groceries, or deposit it into your personal account and buy the groceries out of there, or even deposit it into your business account and buy the groceries out of THERE, you need to make sure the money goes through the proper progressions.  First it needs to be deposited into your business bank account, then deposited from your business into your personal bank account, and then it can be used for personal expenses.

These progressions are important for the IRS, but they are also important if your business was ever sued.  If you have not been separating your business and personal dealings and finances, the courts may decide that they should not separate things either, and allow the person making the claim against you to take your personal assets as well as your business assets.

Take a little extra time to make sure your business and personal money flows through the right channels.  It will serve you best in the long run.

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Separating Business and Personal Transactions

by Lindsey on March 8, 2011

It is important to keep your business and personal finances separate for both tax reasons and liability protection. Follow these guidelines when making deposits and spending money out of your business and personal accounts:

For deposits:

- All business income needs to be deposited into the business account.

- Money can then be withdrawn and re-deposited into a personal account, if the funds are needed for personal expenses.

For expenses:

- All business expenses need to be paid out of the business bank account. By business bank account I mean an account that is under the business name and tax ID number.

- All personal expenses need to be paid out of a personal account.

Even though it will mean adding an extra step to your financial thinking at times, it is very important that you maintain this separation of business and personal finances carefully. Even a small slip up could come back to haunt you years later.

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Business and Personal Finances: Separation is Important

February 23, 2011

When you have your own small business, you will take some of the profits to cover your personal expenses. You need to be careful how you do this for two reasons: 1. The IRS doesn’t like it when you co-mingle funds 2. If you don’t separate business and personal assets, you can lose your liability [...]

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Paying Yourself Through Your Business

February 22, 2011

Paying yourself through your own company should be done in a certain way.  There are two reasons you need to be specific and careful about how you pay yourself. 1. The IRS 2. Liability if your company is sued First, the IRS.  It’s not cool if you just take money in to your company and [...]

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Accounting Reconciliations and Discrepancies

February 21, 2011

At the end of each month when you get your bank and credit card statements, you will need to reconcile the accounts and transactions in your accounting program against the statements to be sure you have entered everything correctly. To do a reconciliation, you will want to print out your statements, then go to the [...]

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How To Do Reconciliations and Correct Discrepancies in Accounting

February 20, 2011

At the end of each month, you will need to do something in your account program.  It’s called a reconciliation.  The purpose is to correct any errors in your entries before they get out of hand or build up. Here’s how to do a reconciliation: – Get the statements for all your bank and credit [...]

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Accounting Reconciliations, and Dealing With Discrepancies

February 19, 2011

Once you’ve entered all your transactions for a month into your accounting program, you will need to double check everything by doing something called reconciling the account.  Accounting programs have a “reconcile” feature built in. Basically what you’re doing is taking your bank or credit card statement and checking each transaction against what you entered [...]

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Reconciations and Discrepancies in Accounting

February 18, 2011

At the end of each month when you get your bank or credit card statement, you will need to reconcile each account in your accounting program against the statement.  This process double checks everything you entered for the month, making sure you didn’t miss any transactions, enter duplicate transactions, or enter the wrong amount for [...]

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Should You Use Cash or Accrual Accounting Methods?

February 17, 2011

When you are setting up your accounting software, it will ask you to choose an accounting method.  This is important and you should check with your CPA to see which method they think is best for you, because you need to report to the IRS which method you are using, and you can’t change it [...]

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Cash or Accrual Accounting Methods: Which is Right For You?

February 16, 2011

Something you need to do when you are setting up your accounting software is you will need to choose an accounting method to use.  There are two: cash and accrual.  The difference between them is in how you record transactions based on timing. Cash accounting: – Transactions are recorded at the time the cash moves [...]

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