Episode 22: What Works Wednesday: Your Business Finances Are Not Your Personal Finances

TRANSCRIPT

Leland (00:01.334)

Welcome to What Works Wednesday. Wanna know one of the biggest ways to fail as a self-employed professional? By keeping your business and your personal finances together and not separating them. You would think that this might be self-employment 101, but I work with you people. I work with single member LLCs, freelancers, all the way up to businesses with over 100 employees. And I am self-employed myself. And you would be shocked.

at how often people keep their business finances and their personal finances in accounts under their own name, not inside the name of the business. Or even worse, all in just their own personal checking and savings. It's a huge problem and it poses a lot of risk to you, the self-employed professional. Because if all of your money is won, then when it comes tax time,

and you have to produce documents like your profit and loss statement, your cash flow statement, your balance sheet. It gets really messy when you can't clearly separate out, this was personal, this was business, this is what I paid myself, this is what I kept in the business because it's all one. And it can help by just having separate accounts, but even if it's in your name and not in the name of a business, it becomes really still very hard to separate that out.

in the event that you get audited by the IRS. Same thing or different but same issue is by maintaining these finances together in one bucket, you run the risk of effectively limiting the protection provided to you through your LLC. So oftentimes I work with clients and they'll say, hey, I have an LLC, but when we break down the finances of the business,

It's all held in accounts within the name of the entrepreneur, not in the name of the business, not held coded by a separate EIN number, Employee Identification Number. The problem with that is the LLC is designed to protect you in the event that you get sued or creditors come after your business. With an LLC, they can only take the business's assets, not yours personally on average.

Leland (02:23.946)

When money is held in your name though, when the business and personal finances are in similar accounts or they're all held in the name of the business owner, well, when the creditors come for the business's assets, there's no defining line. Even though there's an LLC, all the money of the business is held in your personal account. So what's to say what's yours and what's the business's. So you run the risk of effectively eliminating the benefit from having the LLC by keeping your finances commingled.

It is a mess on so many fronts. And so how we fix that, when I sit with people and we have all this money's in the name, either in one account or, hey, this account is for my business, but it's in the name of the entrepreneur, we wanna make sure that you have the LLC set up, like I said, on the last What Works Wednesday. And we've done the pro tip, which is setting up an EIN number, which gives your business

credibility, it gives your business its own number, like a social security number for your business. You need that number in order to create business bank accounts. So you go to your bank and you've got your personal bank accounts and you provide them the EIN number and you say, I need to open business bank accounts, accounts in the name of the business. So now the business as an entity has its LLC, has its own number and has its own bank accounts.

from which point all of your business income comes into that account, all the business expenses go out of the accounts. And that way, when it comes to producing a profit and loss statement, producing a balance sheet, it's very easy because you can just go to that account and see exactly what came in, what went out, and it's not touching your personal. Then if you want to pay yourself, you just pay yourself from that account.

You can set that up through payroll if you want to, or if your tax has an S-corp, you need to have payroll or through distributions depending on your tax circumstances and situation, which will be another What Works Wednesday episode. But it's important to know that you need to keep your business and your personal separate for so many reasons. But when you do that, even though it may feel hard on the front end to go through and

Leland (04:49.358)

create an account and fund the account and change all of your subscriptions for your business or your bills for your business to that account, it's going to save the world of hurt on the back end. So remember, go forth and get the life you want from your business. All right?