Setting Boundaries Part 1

Not only can this make analyzing your financial situation easier and possibly save you money on taxes, it also ensures you stay on good terms with the IRS (who have specific guidelines to follow).

While some personal and business expenses tend to blend together, figuring out how to set boundaries between the two doesn’t have to get confusing. Here’s how you can go about separating your business and personal expenses effectively.

Separate Personal & Business Expenses

Simply put, you want your business to avoid financial headaches and tax issues. 

To do that, you can’t get your business and personal expenses intertwined, even if you used a personal loan to start your business.

According to the National Federation of Independent Business, cash flow and money management are two of the most common reasons small businesses fail. 

If you’re not tracking and separating your business expenses from your personal ones, you run the risk of mismanaging your funds.

And if you accidentally deduct personal expenses as business expenses on your tax report, you run the risk of alarming the IRS. And you could get audited. You don’t want those things to happen.

Keeping business and personal expenses from getting too friendly with one another is just a matter of being diligent. 

Consider Your Business Structure

First, it’s important to consider your business structure, because it affects how you should be legally handling business and personal expenses:

◾Corporations: 

As the Small Business Administration (SBA) states, a corporation is “an independent legal entity owned by shareholders,” so you have to keep personal and business expenses separate. 

But there are still times where the line between a personal and business expense blurs.

◾LLCs: 

A limited liability company is a hybrid structure, with owners referred to as members. An LLC has the limited liability legal features of a corporation, but like an S corporation, profits and losses are “passed through.” 

With an LLC, they’re passed through to the members; with an S corporation, they’re passed through to the shareholders.

If your business is a sole proprietorship, there is no legal distinction between the business and the owner. That being said, you can still report business expenses. 

If your business is a partnership where two or more people, business expenses are deducted in the same manner as a sole proprietorship. But since more people are involved, it’s essential that all parties carefully separate personal and business expenses.

While it might seem easier to operate as a sole proprietorship or partnership, you won’t get the legal protection that you would as a corporation or LLC.