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Business Debt vs. Personal Debt: Know the Difference

Business Debt vs. Personal Debt: Know the Difference

There are fifteen million home-based businesses in the United States, so it’s not uncommon for folks to confuse their personal debt and their business debt. Ideally, the two should be separated by social security and EIN number, but that’s not always the case.

If you’re working to pay off debt, it’s important to understand what you’re personally liable for and what belongs to the business. To help you with that, we’ve put together a simple three-step process for getting organized. This is strictly a guideline, but it should help.

Step #1: Classify Your Business Debt

Auto loans are personal debt if you bought the vehicle using your own credit and personal signature. However, auto leases can be assigned to a company and classified as business debt. Auto loans can too, but that’s less common. Most companies pay cash for company vehicles.

The same principle applies to real estate debt. If you buy a piece of property, are you signing for it as a person or as a company? Businesses have EIN numbers and their own credit rating. To make that debt a business debt, you’ll need to use those to make the purchase.

Credit cards are where most home-based business owners get confused. You can call it business debt if you want to, but it’s personal if you’re using a personal credit card. To keep them separate, apply for a business credit card and use that exclusively for business expenses.

Step #2: Check Your Personal Debt

Once you’ve separated all the business debt, go through your personal debt and double-check it for business ramifications. Remember, for it to truly classify as business debt, it needs to be signed for by the business with payments drawn from a business account.

This second step is also an opportunity to create a debt payment plan for your personal debt. You may want to consider a consolidation loan to get rid of high-interest credit card debt or refinancing to lower monthly payments on real estate or other assets. You can also consult a professional like TurboDebt and plan for your financial freedom. Reading some TurboDebt testimonials might help you make a decision.

You and your business are not the same entity. If you’re working as a sole proprietor using your personal checking account, you are not a business. Take some time and form an LLC or C-Corp so you can get your house in order. Seek professional help in that area if you need it.

Step #3: Set Up Accounting to Move Forward

Rest assured, once you’ve been through this exercise once, you will not want to do it again. To eliminate the need for that, invest in some accounting software like QuickBooks or FreshBooks to keep track of your business expenses and debt payments.

Once the accounting system is in place, you’ll have actual documentation of your profit and losses. That’s evidence of business activity that you can take to the bank to establish a credit profile for the business itself. Couple this with an LLC or corporation and you’ll be official.

Going forward, borrow money for the business as a business. Take out personal loans as a person. Do the same with credit cards and auto leases. Once the system is in place, this gets much easier. If you’re still confused, go back to the top and read this again.

Author Bio: Kevin Flynn

Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.

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