Gines Auto Service
Hole in the Ground
On the Rise
David Hoopes: Putting People First
Candice Davis: In the Driver’s Seat
Home Sweet Office
The State of Security
Don’t Stand on the Sidelines
Cutting Through the Haze
Industry Outlook: Higher Education
In the Hot Seat
Losing its Luster
Utah’s Control4 Goes Public
Companies to Watch
When launching a new small business, intertwining personal and business finances can be tempting. Small business owners live and breathe their business, sometimes even running it out of their homes. Because of so much personal involvement, using business monies to pay for personal expenses, or vice versa, might seem like a good idea, but in reality, co-mingling monies can be a major headache. Follow these tips from industry leaders to keep monies separate and the headache at bay.
1. Set up separate accounts.
One of the best things a new small business owner can do is start from the beginning with separate checking and credit card accounts for personal and business expenses. “A lot of times people think because their business is small they can keep it as part of their personal finances, but right off the bat, just set up a separate account,” says Kimberly Christensen, CPA and owner of Christensen & Company in St. George.
That’s because using personal money interchangeably with business money can hinder a business owner from actually knowing how well their company is doing. “You don’t have a good perspective on how your business is doing if personal expenses are mingled in with business expenses,” says Mike Eggleston, CPA and owner of Small Business Accounting & Tax in Spanish Fork.
In addition, Eggleston says keeping personal and business monies separate is easier if it’s done from the beginning. “Just do it. Don’t be lazy,” he says.
2. Maintain good records. Business owners should understand the importance of keeping good records of all their transactions—whether personal or business related.
“A lot of times, small businesses aren’t sure what to do,” Eggleston says. “They come to me and have no records at all. They haven’t done something as simple as setting up a spreadsheet on QuickBooks so they have some kind of record. Those records are needed to file income tax returns, and going back and trying to reassemble records from eight months to a year ago—they won’t remember what they did back then.”
Keeping expenses separate won’t always be easy or clear cut—especially if a vehicle or cell phone is used for both business and personal reasons—but “if you just label everything in your bookkeeping and keep it labeled correctly, you’ll always know what you did. It’s not always going to be perfect or easy, but you have to do your best,” Christensen says.
3. Keep tax season in mind.
A business must be managed separately from its owner’s personal funds in order to have completely accurate tax returns, because if it’s not, at the end of the year, business owners have to sort through a huge mess, says Ken Klingler, CPA and owner of Klingler & Associates in Sandy.
For example, if a business owner shops at Costco or Walmart to buy office supplies for their business, they may not remember what they bought six months later. This could lead them to assume that the purchase was actually a personal expense to buy groceries. “If it was a business expense and you don’t include it in your taxes, you might miss an eligible deduction,” Klingler says.
4. Think about fiduciary responsibility.
Eggleston says small business owners who co-mingle funds aren’t afforded with as much legal protection as those who don’t. “This has to do with the fiduciary responsibility the business owner has when they establish a small corporation, partnership or LLC,” he says. “Their responsibility is to use it for what it was established for. If they don’t use it for that purpose, that’s an area an attorney will look at and not afford them as much protection because the accounts are not being used for their intended purposes.”
Klingler says there are other liabilities business owners need to think about too. “If you’re paying for personal things out of your business account, and if an IRS auditor sees a lot of personal transactions coming out of that account, he will look at that,” Klingler says. “Nobody wants an IRS agent digging through their personal stuff.”
5. When in doubt, call an accountant.
When it comes to small businesses, it’s important to make sure there’s a good team surrounding the company—including a competent accountant. Klingler says if there’s any uncertainty surrounding a financial decision, business owners should call their accountant. “I’d much rather have a client call me and ask what they think might be a stupid question instead of actually doing something stupid,” he says.