January 14, 2010

During the earliest days of my small business, I simply took care of all of the expenses of the business out of my own pocket, while similarly just dumping the (admittedly small) revenues straight into my personal bank account. 

Since this was an extremely small business done in my spare time, one that blossomed out of pure happenstance that I didn't know would turn into a long-term business, I didn't feel that the process of separating my business finances from my personal finances was an important step.

Yet, as the business kept growing, it became pretty apparent that I would have to make a clear separation between the two.

The only problem was that it was now much harder to do than it would have been back at the start.

During the process of separating my business finances from my personal finances, I discovered several key steps that make the process much easier if you stick to them.

First, erect a wall.  Make it very difficult for money to cross the boundary between your business finances and your personal finances.  For me, the best way to do this was to simply have my business expenses handled entirely through one bank and my personal expenses handled entirely through another bank.

When you first set up that wall, realize that you don't have to move everything over at once.  In fact, doing that can often be financially challenging and detrimental to your business.  The process that worked best for me was to move all business revenue into the "business" side of that wall (into accounts at my business bank) and to continue to pay my business-related bills out of my personal pocket until I was sure that the cash reserves on the business side of the wall could cover everything.  At that point, I began to move all bills over to the new accounts.

During this process, document everything extremely carefully.  This is a time in which something can easily fall through the cracks unintentionally - and such things can really come back to bite you during tax time.  Take it slow, do it carefully, and keep track of every single dime, more so now than ever.

Once the separation is in place, cash should only flow directly over this wall.  Do not directly pay business bills from your personal accounts.  Don't put personal income into your business accounts.  Handle everything by direct transfers from your personal account to your business account and allow no other financial contact between yourself and your business.

For many people, myself included, this time of separation is also the perfect time to carefully consider the legal structure of your business.  For me, the most valuable place to start in this process was with the IRS guidelines on business structures, found here.

Good luck.  This is an incredibly exciting time in the life of any small businessperson, as it's the time in which the business you've invested your time, money, sweat, and tears into is finally beginning to take off.  Enjoy it, because as your business grows, you'll continually meet new problems, ones you never considered before.

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Join the conversation ( 1 )

• Tony Lael 2 years 4 months and 0 days ago

  

  What a great article for entrepreneurs starting out. Unfortunately, we run into situations when companies who have purchased our financial dashboard Corelytics (http://www.coreconnex.com) where the owners of some fairly established small businesses that are making strong revenues have not figured out how to separate personal finances from their business finances. These are usually the people that think of themselves as the business instead of seeing the business as its own financial entity.I would add that if you don't follow the tips above it will be very time consuming, cost a lot of money and a loss of business momentum to make separation later down the road after your business is established.