When you decide to turn your art into a business, you must separate your business and personal financial records.
Here are some steps to take.
Open a business checking account.
If you are a sole proprietor and can’t yet see the need for this just yet, you can start by coding your financial records somehow. Mark each item with “business.” But get the separate account ASAP.
Get a separate credit and/or debit card for your business.
I’m not encouraging credit card debt, but monthly statements make it easy to keep track of finances.
In the U.S., apply for an Employer Identification Number.
Also known as a Federal Tax Identification Number, the EIN isn’t mandatory unless you are incorporated or in a partnership. It can, however, be a protective measure.
If you don’t have an EIN, you would need to use your Social Security Number for business paperwork. The EIN provides you with a level of security to guard against identity theft.
Dedicate files for your business.
I file all of my financial paperwork into accordion folders by month. Every January, used to I purchase two new accordion folders. (I now reuse these so as not to contribute to plastic waste.)
They are different colors so I can distinguish between my business (Stanfield Art Associates, Inc.) and personal records. The files have gotten smaller over the years because I now keep many receipts electronically rather than on paper.
Be diligent about tracking your business expenses: cost of materials, mileage, postage, etc.
[ See ideas for digital financial records in this article. ]
Here's why.
Need a good reason to take these steps?
The IRS wants to make sure you are running a legitimate business, especially when you are claiming deductions. Mixing records makes you look like a hobbyist.
On a more emotional level, a reader recently wrote with a heartbreaking story of dealing with her deceased husband’s grown children after his death. She paid dearly—financially and emotionally—because she had intermixed her personal and business finances. I know she told me her story because she wants better for you.
