One of the biggest mistakes small business owners make is commingling business and personal funds. They fail to set up separate business-only bank accounts and credit cards. They may pay for business expenses out of a personal account, or vice-versa.
When tax time rolls around, these entrepreneurs find themselves in a self-created mess trying to sort out personal from business expenses. Additionally, if you’re unlucky enough to get into a tax audit by the CRA, it makes things even tougher.
It can be especially challenging if the business is structured as a sole proprietorship because the money transferred to the business is deemed capital contributions, and the amounts transferred back to the taxpayer are sorted as being general distributions rather than repayment of a loan. This means the taxpayer can end up with a deemed “wage” even if the business did not make a profit and owe thousands in payroll taxes on the money transferred out of the company. If you’re one of the 20% of business owners who are still not operating out of business exclusive bank accounts, you’re making a mistake. Not only should you set up separate banking accounts for your business, but it’s also recommended that you obtain a business credit card that you use exclusively for business-related purchases. Not only will it help you keep track of business expenses, but it will also help you build your business credit score.