When you are self-employed, it may seem quite easy to slip some personal expenses through the business.
Lines between personal and business finances are easily blurred, particularly in the early days of a start-up, so you may be tempted to buy groceries or pay school fees from business funds.
Even worse, all your money may be intertwined in one bank account. Falling into these traps creates many problems down the line, not least of all from a tax perspective.
Do it right from the get-go
The rule is simple: keep your personal and business affairs separate from the start, even if you’re a sole proprietor.
Open a separate business bank account and only use it for legitimate business expenses. If you don’t, record keeping will be a challenge, impacting on your cashflow, payroll, debtors and even your ability to measure whether your business is growing.
Why mixing the money is bad for business
Using one bank account for business and personal expenses can lead to overspending on personal expenses, leaving you with a shortfall when you have to pay for stock or other business-related costs.
With no clear view of what is happening in your business, you can have a false sense of security thinking that the business is doing well because you are living a good lifestyle.
It will be impossible to keep accurate records for tax purposes unless your business is managed correctly and separately. You also run the risk of not being able to justify certain expenses if you are requested to do so by the South African Revenue Service. This may indicate that you are evading tax, a serious offence.
Regularly dipping into your business funds to pay for personal expenses such as entertainment or clothing shows poor financial management - a red flag for any potential investor or bank you may approach for funding. You’ll also not be able to supply accurate cash flow projections which a lender would require.
Paying yourself
You need cash to pay your personal expenses, and there are different ways to achieve this, depending on the business structure.
As a sole proprietor or partner, you can take drawings, on a regular or ad-hoc basis.
As a personal liability company, private company, non-profit company, public company or close corporation: you can pay yourself a salary as you would any other employee. This salary will be taxable in your own name. In addition, you could receive a share of profits, payable as dividends, except if it’s a non-profit company.
Calculating your salary
Deciding how much to pay yourself can be tricky. There are no hard and fast rules and you need to consider your personal expenses and balance this with what the business can afford to pay.
Keep your personal expenses very lean in the early days of the business – there’s no point buying a flashy car or racking up other personal expenses if you can’t draw an income to cover these. There may also be tax implications, and a tax consultant or accountant can guide you through this.
This article was first published on Smart about Money
** The views expressed do not necessarily reflect the views of Independent Media or IOL.
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