| Separating Personal/Business Finances |
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Temujin_12
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| Separating Personal/Business Finances |
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My wife runs her own photography business (6+ years). It has been successful (as far as sole-proprietorship 0 employees businesses go). During the recent downturn, she saw a certain segment of her revenue flow dry up a bit, so we took the "opportunity" to diversify the business, which seems to have made the business more resilient.
The problem we have is that currently personal and business finances are mixed. This makes figuring out taxes harder than need be and puts a strain on personal finances when the business needs to invest in equipment/marketing.
We've known that we've needed to get things strictly separated, but are wondering when is the best time to do so. For her industry, there is a definite seasonal ebb/flow for business (summer/fall is boom, while winter/spring is quiet).
Compounding this is the fact that winter/spring is when the majority of marketing investments are made. This means that this time of year, the business usually runs in the red.
My question is this:
Is it better to wait until the business is back in the black during summer/fall and then separate finances (ie: open business account with line of credit), or will there be much of a difference if we do that now and just transfer the balance?
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Thu Feb 04, 2010 1:12 am |
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Raptor
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I'm not sure I fully understand the question. I'll take a shot at it. Sole-proprietorship is not a legal entity. For separating business vs. personal accounts you should have a separate checking account. Any money placed into the account from a personal account treat as a capital investment and any money withdrawn treat as owner withdraw of equity. As for credit, since sole- proprietorship is not a legal entity, separate which lines of credit is for personal use and which is for business use. Establishing such physical clear boundaries will make figuring taxes easier and also shows creditors you know how to manage your finances. I will assume by the nature of the question that you probably do not keep your own books of accounting. If this is the case I suggest taking 2 college classes, accounting 1 &2. Then purchase any accounting software such as Peach Tree, MS Accounting etc. They are all easy to use and will provide you instant feedback on financial statements. Additionally you just hit print for reports to hand to your tax accountant. Makes tax time easy. Finally, switch now, the sooner you separate your finances the better. If you get audited, it'll be a mess if both are mixed together. For example if you designate a credit card for business use, you can deduct the interest. However if you have both business and personal debt on the card it is a nightmare to figure out what part of the interest is business related.
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Thu Feb 04, 2010 5:53 am |
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Temujin_12
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Thanks for the reply Raptor.
quote:
Sole-proprietorship is not a legal entity.
Right. We're thinking of incorporating in the near future and want to clean things up a year or two before doing so.
quote:
I will assume by the nature of the question that you probably do not keep your own books of accounting. If this is the case I suggest taking 2 college classes, accounting 1 &2.
She does keep her own books, but they are messy and we are looking to clean them up for FY 2010.
I'll recommend that my wife try auditing a couple college courses. Also, does anyone know of any accounting books that would allow someone with zero accounting experience to become familiar with how to manage business finances better?
quote:
Then purchase any accounting software such as Peach Tree, MS Accounting etc.
I think she has Quicken Business but is likely discouraged when using it because of how complex mixed finances are.
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Any money placed into the account from a personal account treat as a capital investment
Should we be declaring capital investments of this kind on personal/business taxes?
quote:
I'm not sure I fully understand the question
My post was a bit scattered, so I'll rephrase a bit (you already answered the sooner rather than later aspect of it):
I'm wondering if it will be better to get a business checking/credit account now and transfer business balances out of personal finances or to wait until things are in the black and do it then?
I'm sure a bank will look at a situation that is the black more favorably than one that is in the red. But will it make much of a difference? quote:
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Thu Feb 04, 2010 3:28 pm |
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C9Consulting
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Have you considered treating them as totally different accounts? Like make it so that there is no confusion, I would personally just act like the company is paying your wife and keep the rest completely separate.
As for as the book, a beginner's college textbook or accounting for dummies may help, you can get that from half or abe books (both online)
Cloud 9 Financial
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Thu Feb 04, 2010 10:30 pm |
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coaster
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Incorporating a small one-person business isn't necessary. Just keep separate books, and file the appropriate tax documents (Schedule C), which is no problem so long as the records are kept scrupulously
~Tim~
Eye Candy : Why Whimsy
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Sat Feb 06, 2010 3:14 am |
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Raptor
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I meant capital investment as owner equity. Just the terminology that the owner put money, materials, or any asset from a personal account into a business account. Sorry I have to be blunt to answer the second part. If the business is mixed with personal to hide the fact that it isn't doing well, the bank will see that or just get discourage because they can't sift through the data to see what is going on. It is best to separate everything now. Even if the business is in the red and you lay down a plan of how it will make a profit, you stand a better chance for a loan, since you are showing the bank that you know what you are doing. Part of getting a business loan is showing the lender you are organized and know what is going on with your business. Past performance is only part of the equation. Showing the past performance with a plan ahead towards profit, you'll stand a better chance.
Why Incorporate, is your business resulting in high risk? Incorporating is going to require lots of paperwork and mandatory fillings. The advantage is that you personal assets are shielded. You can get the same protection from an LLC and not have to deal with all the mandatory fillings.
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Mon Feb 08, 2010 10:56 pm |
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daveskin283
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Tue Sep 07, 2010 8:48 am |
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