When you’re starting a business, you will have a number of professional challenges: writing a business plan, obtaining funds to build the business, hiring employees, finding an office or retail space to open, obtaining the necessary business licenses and permits, and so on.
I know firsthand the financial challenges of starting a company—just five years ago, Betterment was a company of only four people. Today, we have grown to a company with nearly 80 employees.
Spending too much time on administrative tasks takes away precious energy from working on your core product.
However, perhaps one of the largest difficulties for any entrepreneur is figuring out how you’re going to manage the finances of this thing you’ve worked so hard to create.
Even if your personal and professional lives overlap as an entrepreneur (and they likely will), there are some important reasons not to let your money do the same. Namely, taxes.
To make the process more efficient for you, I am sharing some of things I considered as a startup business owner. These steps can help you avoid the financial entanglement between personal and professional life that often comes with owning your own business.
1. Segregate your bank accounts.
Even if you’re funding your own business to start out, setting up separate checking and savings accounts for your personal and professional expenses is the first step in staying financially organized.
Doing this will not only help you more easily track in-and-out expenses of your business and help you to avoid intertwining them with personal expenses, but it will also make tax time a lot easier (and your accountant happier).
If the IRS ever questions whether what you’re doing is a hobby or legitimate business (make sure you know the IRS guidelines), having a separate bank account for your company is a good place to start. Plus, whatever your business owes to the IRS come tax season won’t drain your personal accounts.
2. Streamline expense reporting using technology.
One of my core values as an entrepreneur and CEO is efficiency—spending too much time on administrative tasks takes away precious energy from working on your core product. Tracking receipts and managing expenses through innovative technology is an easy way to reduce time spent on that kind of work. At Betterment, we use a receipt management software program—it’s cut the time we spend managing the process dramatically. Now we just click “approve” and employees are magically reimbursed.
Other apps allow you to create photo receipts, expense reports, and enable you to easily import your reports to many popular types of accounting software.
3. Open separate credit cards.
Using a separate credit card for your business gives you something else to show the IRS should you ever be audited. It also makes record-keeping much more efficient, allowing you to have all expenses in one place when it’s time to pay the bill. Not to mention, if you’re carrying a balance on your business credit card, your interest is tax-deductible.
4. Determine how you plan to structure your business.
How you structure your business will affect your company’s finances—particularly taxes—so consult a financial professional or do research on the structure that makes sense for you.
If you own your own business and it’s structured as a limited liability company, or LLC, your personal finances can be protected from any financial pitfalls or debts your company may experience. For example, if your business is sued, your business assets are the ones at risk, and—in most cases—no one can go after your personal expenses. (Note: It does not necessarily protect against wrongful acts by you or your employees.)
Additionally, as an LLC member, you may benefit from pass-through taxation, meaning you can personally report your LLC’s income and losses on your federal tax return. As tax laws vary from state to state, you will want to talk to an accountant about what this will mean for you.
Other common structures include:
- Sole proprietorship, which means you are the sole owner and operator of the company.
- Partnership, which is a business between two or more people who share ownership of the company.
- Corporation, which is an independent legal entity owned by shareholders.
- S corporation, which, like an LLC, allows for pass-through taxation so owners can report income or losses to owners/investors in the business, allowing the S corp to avoid double taxation. (Double taxation can occur because shareholders can be taxed on dividends, even though the income has already been taxed at the corporate level.)
Keep in mind that there are pros and cons with all these options, and it’s important to know which structure is financially right for you. (You can learn more at www.IRS.gov.)
Betterment is not a tax advisor, nor should any information in this article be considered tax advice. If you need tax advice, please consult a tax professional.