68: Find Financial Clarity: How to Separate Personal and Business Expenses

See the show notes for this Episode here.

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Transcript:

Bonnie Christine [00:00:00]:

I had just found myself in this entangled web of mixed expenses. I was so overwhelmed. I was unable to clearly see where my personal spending ended and my business costs began, and I knew something had to change. So I just took a deep breath. I armed myself with some financial armory, and I started the process of separating my expenses.

Bonnie Christine [00:00:29]:

I'm Ani Christine, and this is where all things creativity, design, business, and marketing unite. I'm a mama living in a tiny town tucked right inside the Smoky Mountains, running a multi 7 figure business. Doing the most creative and impactful work of my life. When I first set out to become an entrepreneur, I was struggling to make ends meet and wrestling with how to accomplish my biggest dream of becoming a fabric designer. Fast forward to today, I'm not only licensing my artwork all over the world, but also teaching others. How to design your creative life and experience the same success. I'm here to help you spend your life doing something that lights you up I'll help you build a creative business that also creates an impact, changes people's lives, gives you all of the freedom you want,

Bonnie Christine [00:01:26]:

and is wildly profitable. Welcome to the professional creative podcast. We are diving deep into a crucial topic today That's often a pain point for so many creative entrepreneurs. It's our finances. Specifically how to separate personal expenses from business expenses. And I have to say, as embarrassed as I am to say this, it is a task that I personally struggled with 4 years but finally conquered it. I conquered it back in 2016. I never looked back, but I had many years where this was 1 of the biggest pain points in my life. So I wanted to kind of roll back time talk about why I thought it was so difficult, how I overcame it, and why. If you are struggling with this how you can rise above because, honestly, it's so incredibly important and 1 of the best things I ever did. I know you're thinking Finance is really bony. That's not creative or fun. But before you turn off this episode, Just trust me. I felt the same way. But in our journey as creatives, there comes a point where our art and our passion starts to become a business and intermingle with our income. And when that happens, things can get a little messy. But before we dive in, I have to tell you about the freebie I have waiting for you over on professional creative dot com. I have compiled a enormous list, 100 tax deductions for the creative entrepreneur. This resource is so exciting, and it's designed specifically for you to help you take advantage of all the potential tax deductions and savings that you might be missing out on because, trust me, they add up fast. We've included everything from traditional business expenses to those that are more unique to us creatives, things like artwork materials and portfolio development costs. Like I said, there's a total of 100 potential deductions that you should be aware of because why leave money on the table if you don't have to. Right? Head on over to professional creative dot com. Grab your free cheat sheet and start saving. Let's ensure that your hard earned money is serving your business in the best way possible. You'll find this again at professional creative dot com. So why is it so crucial to separate personal and business expenses? Well, aside from just making your life and maybe your counten's life easier when it comes to tax time. Keeping these 2 aspects of your life separate gives you such a clearer picture of your businesses overall financial health. It also provides a sense of just true professionalism and legitimacy to your venture. And just trust me, once you've separated these finances out, the sense of clarity and control that you feel back over your business is truly incredible. So before we get into the actual steps that I suggest taking in order to get this ironed out, I wanna go over just some simple business structures. Now before I do that, you need to remember that I am not an accountant. Or a bookkeeper or a lawyer. And so this is not like professional advice, but it is my understanding of all of it. So please go seek professional advice if you have questions about any of this. But before we get started, I wanted to just do an overview of what the 3 most common business structures are, that would be a sole proprietor, an LLC, and an s corp. And I know that oftentimes these things are just confusing. We're not exactly sure which 1 we should be, how to sign up for it, and all of that. So let's begin with a sole proprietor. Picture this. You're a photographer or an illustrator or a freelance writer who's just starting out and you're the only person involved in your business, and you prefer to keep things simple, especially when it comes to paperwork and taxes. So in this case, you might start out as a sole proprietor. This means that there's no legal distinction between you and your business. It's the easiest way to start a business, and you report all of your business income and expenses on your personal tax return. However, it also means that you are personally liable for any business debt or legal issues, which can be a significant risk, which takes us to a limited liability company. This is typically called an LL see. Now imagine your freelance work is taking off. You're making good money, and you're starting to feel a little more serious. About this whole running a business thing, it's probably time to consider forming an LLC. So an LLC c provides more protection than a sole proprietorship. If something were to go wrong, like you had a law suit or some kind of debt, your personal assets like your car and your home would generally be protected. So the limited liability part is like a safety net for your personal life. Plus you can still report your business profits and losses on your personal tax return, which keeps things somewhat simple but yourself more protected. Then finally, we get to an s corp or s corporation. So now imagine your business is booming you're making substantial income. By substantial, we typically think about 50000 dollars a year in profit or more. And you may have an employee or contractor, and you're thinking about ways to save on your self employment taxes. So an s corp might be your next step. With an s corp, you become an employee of your own business. You have to pay your self what's considered a reasonable salary, which is subject to employment taxes. And then any remaining business profits are then distributed to you as a dividend, which are not subject to self employment taxes, which potentially saves you money. So keep in mind though that this structure requires some more administrative work and its stricter compliance with regulations, but it does offer you likely the most savings if you're at that point in your business and all of the same protection as an LLC. So no matter which of these you are, it is vitally important for you to separate. Keep separate your personal expenses from your business expenses. So for instance, if you are an LLC but you fail to separate your personal and your business finances, then you might lose the protection that the LLC was giving you in the first place. This is referred to as something called Piercing, The Corporate Veil. And it can occur when the business and you don't maintain separate identities. And so if your business were to be sued or fall into debt, then your personal assets like your home, car, and personal bank accounts could also be at risk because you didn't treat them separately. So the government is not gonna treat them separately either. So you absolutely want to make a good practice of keeping these organized and separate. There's also a lot of tax complications. Separating your business and your personal expenses makes it so much easier to file your taxes when April comes around. It provides clear documentation for your business income and deduct and it's just absolutely essential if you were to ever get audited. And if your expenses are ever intermingled, it's harder to prove that the deductions were indeed for business, and it could just lead to a whole bunch of fines and penalties. And basically, not a fun situation. So it also really helps with your professional perception as well. Keeping your personal and your business finances separately helps with internal organization, but just think about what it helps your business to be evged as by external parties as well. So things like banks and investors and maybe even clients, if they're aware of it, If you're seeking like a loan or some kind of investment, those providing the funds are going to absolutely want to see that you're running everything professionally including having your business finances separate. Also, the amount of financial clarity is just so nice. When everything is mixed, it's hard to get a clear picture of your business' financial health. And so by separating these, you'll be able to accurately track your revenue, your expenses, your profitability, your cash flow, and that's really all crucial when you start taking yourself just more seriously, and you want to make informed business decisions. So while it might seem easier or simpler to just have 1 bank account, the potential risk and all of the downsides significantly outweigh the potential inconvenience. So by separating these, you'll safeguard your personal assets. You'll simplify your tax process. You'll present yourself and your business professionally. And you'll gain a clear understanding of your financial health. So I've got 5 simple steps that we're gonna dive into, but I just wanna tell you my own story first. I just fell for these myths that, you know, my business wasn't at the right stage or it was difficult to separate expenses, which is so silly because I'm talking about Let's see. I started separating everything in 2016. So we're talking about 7 years of me having expenses that were just intermingled. And every time we would come to tax season, I would end up in tears. Because I would have to start way back at the beginning of the month or the beginning of the year and line item by line item go through and separate everything that was business versus personal. And it was so incredibly difficult. I wouldn't remember certain expenses. I wouldn't be able to find certain receipts. And I knew that I needed help, and it just felt so incredibly overwhelming. Another thing that really tripped me up was my PayPal account. And I just remember this, so I'm gonna talk about it in case you have the same thought. I had 1 PayPal account, and I used it all the time. I used it to take in money for things like my membership, but I also used it to, like, and my husband's mom, grocery money. You know? And I just thought, this is so difficult. I've got to use this online, you know, payment transfer thing to process so many different types of payments. But I finally realized all I have to do is just open up a secondary PayPal account. Make 1 for personal and 1 for business. It was so incredibly simple, but I just had never really wrapped my mind around it. And so this takes me back to August of 2016, and I hired 1 of my very first hires, a bookkeeper. Now her name is Amy Northard. She still does all of my bookkeeping. I'll link to her in the show notes for today's episode. And it was August. And so in my mind, I was also thinking we should probably wait till January. Like, let's just we're already -- more than halfway through the year, it's too far gone. And she just really helped me wrap my mind around it. No. Let's go back to January. We'll start separating it. I'll give you month by month. We'll do it together. And then from this point on, we'll keep everything separate. And it was just incredible. It's 1 of my favorite things we ever did. So it's June, and if you're struggling with that, it's not too late. Start right away. And 1 of the things that I can't recommend highly enough is just to work with a bookkeeper. It's simple. They will help keep you on track. And so today, what this looks like is that at the end of every month, I get a list of any expenses that they're not already certain of, and I just quickly, 1 line at a time, run through what they were for. Which just keeps me on top of all of our expenses. It's so incredibly nice. And so I had just found myself in this entangled web of expenses. I was so overwhelmed. I was unable to clearly see where my personal spending ended and my business costs began. And I knew something had to change. So I just took a deep breath. I armed myself with some financial armory, and I started the process. Of separating my expenses. So here are the steps that I took, and you can absolutely take as well. Number 1, open a separate bank account for your business. This is the most important step you can take to separate business and personal and it's very simple. All you have to do is go to your local bank or research it online, find out what they offer in terms of business accounts, And when you open your business account, just make sure that all the money made from your business goes into this account, and all of your business expenses come out of this account. This will give you such a clear understanding of your business's income and expenses without the confusion of personal transactions. Next is optional, but if you want a business credit card, you can apply for a business credit card. Now we had many years where we did not do credit cards, we only use debit cards. So either way, if you just want to use a debit card, make sure you get 1 for your bank account. Today, we have 1 business credit card, and oftentimes, I need a credit card to handle some of the bigger expenses inventory that we are, you know, doing in the business. But we always we have it set automatically. We always pay it off before the end of the month because what we're not doing is going into debt. So if you want a business credit card, just make sure that you stay on top of it, but it is an easy way to separate those business expenses. This allows you to just easily track all of your expenses made with the card, and you can also get some benefits Right? Like, cashback or points or travel rewards if you travel a lot or something like that. But just remember that a credit card like, going into debt on a credit card is never worth the perks, so don't do it just for that. Make sure to stay on top of it if you have 1. Step number 3 is to draw a clear salary from your business. So this is another 1 I struggled with for many years, but as a creative entrepreneur, it's just easy to take money from your business account whenever you need it. But this can lead to confusion, and it -- doesn't really give you a true representation of your businesses' profitability. So instead of that, decide on a regular salary for yourself. This could be a fixed amount that you get every Friday or every 2 weeks, or it could be a percentage of your profits transfer this amount from your business account to your personal account consistently. You need to treat it as a necessary business spence. So there were many years where I literally had pages of checks, and I would run it through our software. We use Gusto. I'll link to that in today's show notes as well. And it would be a check from Bonnie Christine to Bonnie Christine signed by Bonnie Christine. But it was my salary. I was drawing a salary just as if I was an employee of my own business. Not that you can't take more money than that. That's called an owner's withdrawal, but it at least formulate a regular salary that you are getting deposited in your bank every week or every 2 weeks. Number 4 is to keep detailed and accurate records. So maintaining good records is just vital for understanding your finances for tax purposes and keeping track of all of that income and expenses either through, like, a ledger or a spreadsheet or a software. Like, QuickBooks is what we use Just make sure to include the date, the amount, and the purpose of each transaction. And so keep all your business receipts in 1 place. You know this. You likely just feed me to remind you that it's so important. You can use a digital app like Evernote. If I ever have a business meal, I always write on the receipt who I was with, what we were talking about, and then I take a picture of it. And I have I take pictures of all of my receipt and then I just make an album on my phone that says, like, 20 23 receipts. And so I have all of that, and I can organize it later. That way, I'm not, like, keeping up with paper receipts because I would lose those all the time. Number 5 is to regularly review your finances. Just make sure to review them, understand what's happening in your business, And so this could be on a weekly basis or a monthly basis, but I would never go further than a month because after 1 month out, if you try to go back and really figure out what expense was for what, it's amazing how much you'll forget. I don't remember what that was for. And so depending on what works best for you, set the time frame and then just check your income, your expenses, and your profitability. Again, a bookkeeper is going to make this run so smoothly. It's gonna be 1 of the best investments you've ever made in your business. It's gonna take so much weight off of your shoulders to know as someone is just helping you stay on top of all of this. So these steps don't have to be overwhelming. Just start with 1 and work your way down the list each tiny step that you take towards getting this all ironed out will bring you more clarity and control over your business and That's gonna allow you to focus more on your creativity and less on your financial stress. I know that many of us think our business maybe isn't big enough to warrant going to the trouble of separating out expenses or maybe think that it's just too complicated to do this. But let me tell you, no matter if you're making a hundred dollars or a hundred thousand dollars, Treating your creative work as a business from the get go will help establish these professional habits and structures so that you're ready to scale when your business scales. It's gonna make tax time so much less stressful. And it's gonna allow you to see how your business is truly doing financially. And it'll help create a clear boundary between you and your business -- which is so important. It's not too complicated. You know, I know that it may seem easier in the short term to just kind of have it all together. But in the long term, it creates so much more work and so much more confusion. So do yourself a favor and just start now getting a clear picture of your business' profitability. It actually will simplify everything in the long run. So as a recap, I know that we've all felt this pain point at some point in our business. Some of you have maybe already conquered it like me. Others of you are just getting started, and others of you are in a tangled mess like I was. But Getting out of that is not as difficult as it may seem, and doing so is 1 of the most important things you could ever do consider hiring a bookkeeper or working with a bookkeeper. It's 1 of my favorite decisions that I've ever made. Open up a separate bank account for your business. Make sure that you have a business only debit or credit card. Start drawing a clear salary from your business, so pay your self as if you were an employee of your own business. Just keep super detailed and accurate record and then remember to regularly review them on a set schedule either once a week or once a month. Okay. So it's your turn. I want you to pick up wherever you need to in these steps, go ahead and get started. However you need to, I think you'll be amazed at the clarity that it brings. Now before we wrap up, don't forget to head on over to professional creative dot com. Go to the show notes for today's episode and grab your copy of our business tax deductions cheat sheet. We've pulled together 100 tax deductions that you could be using in your business, and I think you're going to love to sit down and really brainstorm all of the things that you're doing in your business that you can take advantage of from a tax perspective. Now just remember, again, I'm not a professional, so always consult a tax professional so that you can understand what you can and cannot deduct based -- situation and the current tax laws for where you live. As we wrap up, I just want you to remember that as creatives, we are capable of more than just creating beautiful things. We're also capable of managing beautiful businesses. Create the beauty that you want to see come alive in the world. And remember, there's freedom for you.