Finances are like friends. If you’re nice to them and treat them well, they’ll totally be there for you after one too many Pina Coladas. But, if you blow them off and act shady, they’ll become your frenemy and selfie your bathroom misadventures.
Treat your finances well by following these bookkeeping best practices.
Using Your Business Bank Account
Your business bank account is a fortress where only your business transactions live. It’s completely separate from your personal finances. Like Capulet and Montague separate- they don’t talk, text or DM.
So why all the Shakespearean drama between your business and personal finances? Because keeping them separated makes your bookkeeping WAY easier. Not only does it cut back on the amount of time you spend bookkeeping, it also cuts back on the frustration.
No more hunting for expenses, receipts, and trying to remember what’s a business expense and what’s not. All the transactions in your business account should be business related in some way. This, my friend, is how you get really clean books.
Also, as an LLC taxed as an s-corp, your business is a separate entity from yourself. And just like it’s legally separated from the personal you, it’s finances are separate from your personal finances.
So what do you use your business account for? Business deposits and withdrawals. Let’s start with deposits.
You should only deposit the following into your business account:
Business income: This is any money you receive for the sale of your product or services. If you receive payment electronically (like through Stripe, Square, Intuit Payments, or Zelle), make sure these deposit into your business account.
Shareholder contributions: Anytime you’re putting personal money into your business, deposit that money INTO the business account.
Transfers from other business accounts: Examples are transfers from PayPal or your business savings.
Loan disbursements: If you receive a loan for your business, deposit into your business account.
Here’s what you should not deposit into your business account (unless you want a plague on both your houses):
W-2 income: Any income you receive via a W-2 is personal income and goes into your personal account.
Personal gift income: That $10 birthday check from your grandmother does not belong with your business income.
Personal reimbursements from friends/family: Did your bestie Venmo you cash from last night’s food truck extravaganza? That’s going straight to your personal account.
Next, you’ll use your business account for business withdraws, like:
Expenses: Everything you buy in your business should go through your business accounts.
Payroll: Wages and payroll taxes are both paid out of your business account.
Transfers to business savings
Business credit card payments: Don’t pay your business credit card with your personal money- that’s a hot mess nobody wants to walk into.
Shareholder distributions: Transfers from your business bank account to your personal account.
Handling personal deposits and withdraws in a business account
Mixing your business and personal accounts will cause the bookkeeping apocalypse. Fractions and decimals will fall from the sky in a fiery rage. The earth will open and molten formulas will spurt into the air. Winged sums and totals will fly through the sky, inflicting their wrath on bad accounting advisors.
Just kidding...we’re all human and make mistakes. That includes accidentally mixing up your personal and business expenses.
Before we get into what to do if you deposit or withdraw personal money from your business, we need to talk about equity. Equity is how much of your business is actually yours. It’s what you own after you take into account money owed to others (aka your liabilities).
Where this comes into play is that Collective will use the equity accounts Shareholder Contribution and Shareholder Distribution to categorize personal money you put in or take out of your business.
Equity accounts don’t show up on your Profit & Loss report because they’re not income or expenses. If you put $10,000 into your business, you don’t want to get taxed on that because it’s not actually income. Just like taking $10,000 out of your business personally isn’t a tax deduction.