Starting your own business or becoming a sole proprietor is exciting until you start doing paperwork. Inexperienced business owners struggle to keep their business and personal finances separate.
Usually, they can’t state a clear boundary between business needs and personal needs. They tend to think that the two are just the same. Money earned from the business is used for personal reasons; personal funds are used to cover business expenses. This error is frequently the primary focus of taxation scrutiny.
Here’s a step-by-step guide to effectively separating your business and personal finances!
Register a sole proprietorship
As a sole proprietorship, you have an unlimited liability that can extend to personal assets. To avoid mixing your personal and business assets, register your company immediately.
In Malaysia, you can start by naming the business. Apply for the Suruhanjaya Sarikat Malaysia (SSM) Request for Availability of Name. For each name submitted, there’s a fee of RM30.00. After that, you can register the name to obtain approval from the SSM. Once the application is accepted, you will get a Registration Certificate.
Open a business account with a bank
Now, you can open a business bank account. It’s the key to separating your business and personal finance. When you use your personal bank account, it can make the bookkeeping process difficult.
Business bank accounts are different as it’s explicitly created for business purposes. You can use it for various business purposes, including paying rent, purchasing utilities, and paying employee salaries.
It’s also better to separate saving and checking accounts. For checking accounts, adjust to your business needs. If you conduct many transactions, go with an adaptable bank with an extensive network. Then for a savings account, choose a bank that has high yields and low fees.
Pay yourself a salary from the business account based
Remember that you’re also working for your company, which means you must compensate yourself. Add yourself to the payroll. Keep it professional, as it will prevent you from using company funds for personal gain. You officially separate your business and personal finances when you put yourself on the payroll. This will later assist you in dealing with operational issues such as bookkeeping and tax reports.
Monitor business use of personal items and document your usage
Do you frequently use your personal assets, such as cars, for business purposes? It’s essential to check regularly.
Make a detailed record of each consumption. If you use your home as an office, you must record the electricity used for business purposes. Similarly, when it comes to vehicles, try to keep track of expenses like gasoline and service fees. This is because businesses’ use of personal items is tax-deductible. The more detailed your usage track document, the easier it will be to calculate taxes in the future.
It’s easy to treat your business and personal income as the same thing, especially when you are a micro or small business. It’s essential to keep them separate for accounting and tax purposes. You will avoid issues with the LHDN, which could jeopardize the assets you have worked so hard to acquire. One way to reduce the risk of business losses is to keep clear boundaries between business and business finances. Make sure you can separate the two!
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