Published By Janet Gershen-Siegel at August 8, 2017
It is a responsible question to ask: how can I separate my personal credit from my business’s credit? It is particularly important when you are a sole proprietor, or you’re just getting started, or both.
So here is a countdown of the top seven ways to separate your business and personal credit and keep everything from becoming commingled (and make the IRS happy while doing so!):
Nothing says commingling like paying your business expenses with My Little Pony checks. So don’t!
Instead, talk to your local bank about getting a business checking account. It will take, maybe, a half an hour. Not only will your financials be better organized, you will also be able to see just where your money goes. As for your own funds, pay yourself (you do pay yourself, right?) and then deposit those funds into your personal account. Then treat it like a salary from any other company.
Use this account for all of your business-related transactions. Plus a business checking account lets your business use employee payments as tax deductions from income. And it also lets you show personal income for necessaries such as loans, credit, and taxes. Business lenders will want to see these bank statements to really see how you’re doing.
Lots of suppliers and lenders like to extend lines of credit to businesses. This can help you finance purchases and conserve cash. So get your financing from sources such as business credit cards, bank lines of credit, vendor lines of credit, and even equipment leasing.
This helps your company build a business credit history. And, just like for your personal credit history, always pay on time. The business credit bureaus will add your positive payment history to a credit file dedicated just to your company. In addition, you might be able to deduct interest from business credit cards. When you apply for a business card, make sure to verify that the card provider reports to business credit bureaus and not to personal ones. This also helps assure your personal credit doesn’t suffer when your company hits lean times.
Also open credit lines with vendors and suppliers, e. g. trade credit. This can give you extra time (net 15, 30, or 60 days) to pay for supplies and services from places like Staples or UPS or Home Depot.
These include everything from Wi-Fi in your business’s name to a cell phone for your business where your business gets the bill and you don’t. Your business could pay a phone provider or even the oil or gas bill, if appropriate. As with credit cards and trade credit, your company will see credit scores rise by paying the bills on time.
This goes beyond a business website (although that is a good start). It also means paying for hosting through your company for its own site, a part of #5. It means moving your personal site off the company’s server and hosting account. Stop using Gmail or the like and get dedicated email. Start social media accounts for your company, and don’t forget to lock down alternate spellings, if appropriate (for example, if your company has the number 5 in its name, then lock down both 5 and Five plus the remainder of the company name). Make sure to also grab domains for your business name plus stinks (and stronger language); if you need them, you’ll be very glad you took this step early if your company is ever in crisis.
Social media presence is key, but different companies work best with different platforms. However, no matter what, your company needs to be on Facebook, which has become the informational directory on the internet. As for other platforms, consider your customer base. If you sell children’s clothing, your customers aren’t just kids; they’re also their parents and grandparents, so grow your social media presence accordingly.
If you operate your business as a sole proprietor you should at least file a DBA (doing business as) status. If you do not, then your personal name ends up being your company name. And you can still end up being personally liable for all your business debts. Per the IRS, with this structure you have a 1 in 7 chance of an IRS audit versus a 1 in 50 chance for incorporated businesses! Avoid confusion with this step, and lower your chances of an IRS audit.
Just like with personal credit, it quite literally pays to stay on top of this. However, it pays even more in case errors in credit reports reflect ownership or responsibility questions even if you have separate business accounts.
A business credit score can fluctuate a lot, particularly when your company is new. As a result, your lenders and creditors will reassess your company’s creditworthiness on an ongoing basis. If your credit worsens, loan and credit terms may be adjusted or stopped completely. Without notice, you have to pay cash on delivery for supplies instead of a 30 days payment cycle. So be sure to monitor regularly and avoid surprises.
Meet with your tax advisor or financial planner to determine which legal entity (sole proprietor, LLC or S-Corp) best fits your business and financial situation. Incorporation will help protect your personal assets in the event of a lawsuit, too. Once your corporation or LLC is registered on the Secretary of State’s website, you can get a Business Federal Tax ID Number, so you can open your business’s bank account (remember #7?).
You can’t go wrong with untangling your finances.