When starting a side hustle from home and growing it into a real business, it’s easy for the finances to get a bit muddled. Without formalizing things properly from the beginning, even solopreneurs can get themselves into a financial pickle.
To avoid that, here are five ways to better separate business from personal finances.
1. Form a Company
While you can always work as a sole proprietor with pass-through processes, it’s a better idea to incorporate. This automatically separates business finances from personal ones because the checking account and name on the account are different.
There are several types of incorporation possible. One is an LLC which is attractive to people who like to keep things simpler. Distinctions apply with LLCs, so it’s important to see if an LLC is right for you.
For the protection of personal assets, it’s also important to keep money separate to avoid an LLC appearing like it’s used for personal use too.
2. Use a Business Credit or Debit Card
A business debit or credit card makes it simple to completely separate online and offline transactions paid for by Visa, Discover, or other payment methods.
Ideally, you should also keep your business card in a different part of your wallet or purse. This stops you from reaching for the wrong card when going to pay for something. Indeed, it pays to pause and double-check each time whether you’re using the correct card for the right purpose.
Also, ensure that you get a card with the best rate.
3. Create a Budget for the Business
To further distance yourself from the business operations, create a budget that only applies to the business. If you’ve previously managed money together and used a single spreadsheet for it, it’s time to stop doing so.
Creating a budget only for the business allows you to think more clearly about business income and expenses. Forecasts can provide some insight through the planning process; what projects are fundable and those that must be left to a later time. Also, if there’s an expected financial bump in the road due to seasonality or another cause, then it becomes significantly easier to plan for this eventuality too.
4. Receive a Salary
Whilst it may be tempting to live off savings in the early days, or to pay a minimal wage and wait for the dividends, it doesn’t always set the right tone.
By paying a fixed salary from the business to your personal checking account, it formalizes the relationship with you as the founder and CEO, and the business as a distinct, separate thing. While it may seem odd to pay a salary at first, especially when only just getting started, it’s unrealistic not to do so. The business needs to stand on its own feet and support the people working for it, even if that’s only you as a solopreneur for now.
The alternative is perhaps having some stated earnings for the business but making them appear unrealistic because a reasonable salary was not paid out. It can appear to artificially inflate the earnings figures which isn’t the impression that you should be wanting to convey.
5. Avoid Using Company Assets in Your Personal Life
It may seem natural to use your laptop for personal matters, but it’s best to keep it business only.
Keeping it separate means a clear division between work tasks and personal ones. This flows right down to password managers like LastPass where the business laptop is logged into a business account and a separate personal computing device uses another account or alternative solution like Dashlane.
By creating a division between business finances and personal ones, it becomes easier to keep things separate in other ways too.