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How to Separate Your Small Business from Yourself

As I have mentioned in previous blog posts, a business is not you and you are not the business. You own and control the business entity but you are not the business itself. Differentiating yourself from the legal business entity is crucial since a business is considered a legal entity by definition of tax and business law.
Important:  The idea of a “business” starts by separating the new venture into three distinct parts:

1. You
2. Business entity (sole proprietorship, LLC, partnership, corporation)
3. Income sources

I use this checklist to help my clients understand how to separate their business from their personal life.
1.  Avoid naming the business after yourself — always choose a name for your business or sole proprietorship other than your own name.  Here’s why:

  • Helps you mentally keep the idea of operating a business separate from your personal life.  Remember, the two are not one and the same thing.
  • The business is more attractive to lawsuits if ownership is readily identified within the business and therefore a plaintiff can more easily identify assets.
  • The name of your business is not as important as the product or service you offer; don’t get caught up, therefore, in naming the business after yourself.

2.  Avoid co-mingling personal and business money because it creates problems:

  • It dilutes tax deductions.
  • It makes your business appear to be a hobby rather than a legitimate profit-making venture.
  • It prevents you from seeing when you are profitable or not.
  • It creates problems when IRS audits come along.

Thus, set up a separate checking account for your business and dedicate separate debit and credit cards for the business.
3.  Register your business name with the proper controlling authorities.
4. Obtain a business license from your city.
5. Set up a separate accounting system for your business including a balance sheet, and a profit and loss statement. For more information on these two important documents or any other questions, please contact me: alan@moneymastery.com.

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