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The Definitive Guide to Separating Business and Personal Finances

Meredith Turits

Contributing Writer at Fundera
Meredith is a writer and editor. Drawing on her background in small business and startups, she writes on business, finance, and entrepreneurship. Her writing has also appeared in the New Republic, Rolling Stone, Vanity Fair, ELLE, The Paris Review Daily, and more.
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No matter what industry you’re in, money is the great unifier among small business owners. Whether you’re spending it, trying to keep track of it, or (hopefully) making it, money is always on your mind. And there are a few things every business owner needs to do in order to manage your money the right way—but nothing’s more important than separating your business and personal finances.

Sure, you could keep your business and personal finances together. You could also stick your hand in the oven to pull out a tray of brownies without an oven mitt. But, as you know, there’s a big difference between “could” and “should.”

Why should you be concerned about keeping your business and personal finances separate? Legal liability, easy bookkeeping, and good financial hygiene—both for you and your business alike. Establishing a financial firewall between you and your business (even if your business is just you on your own!) is pivotal for your own protection and sanity come tax time. And, above all, seriously important for protecting your personal assets.

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Why Commingled Finances Is a Bad Business Decision

Maybe you’re a new business owner just starting up, a freelancer who’s just starting to get a little more serious, or someone who’s been chugging along for a while. No matter your situation, you’re going to want to separate out your personal cash from your business dealings:

Legal Implications

You’ve likely gone through the semi-arduous process of filing a lot of paperwork to become an LLC, partnership, S-corp, or C-corp. And one of the reasons you did that? For the legal protections that establishing a distinct, separate business entity affords you as a business owner.

But if your personal and business finances are muddled, those legal protections aren’t in effect (what’s called “piercing the corporate veil“)—there literally isn’t a way to delineate between you, the business owner, and you, the private citizen. So, if, for instance, a client brings a lawsuit against your company and a judgement goes against you, you’re now personally exposed for damages…

Personal Asset Exposure

…which brings us into this second point. Say you do lose that lawsuit (and we certainly hope you don’t). If you don’t have that protection in place by dividing your business finances, you risk opening up your personal finances to seizure when that judgement goes against you.

Similarly, in cases of business bankruptcy in which you don’t have a separately established business entity, your personal credit score will tank along with your business credit score (if you have one—more on that below).

Bookkeeping and Tax Headaches

If you haven’t gotten a slap on the wrist from your bookkeeper or accountant yet for your commingled finances, it’s coming. Certain business entities are required to file entirely distinct business tax returns. And even pass-through business entities that pay taxes passed through to personal returns—hence pass-through—require certain types of distinct, detailed documentation come tax time. Especially if you’re considering writing off any kind of business expenses.

If your accountant needs to dig through your personal records to identify business purchases from a year ago, it’s not only an arduous waste of time, it’s potentially inaccurate. That could lead to an IRS audit on your tax returns… which speaks for itself.

Business Lending Effects

Your business might be so new that the thought of applying for a business loan right now seems next to impossible. But there might be a time when you want to finance a great opportunity—and, if that happens, you’ll be expected to submit your both your personal and business tax returns for lenders to evaluate.

But if you’ve filed both together since you have commingled finances, that’s a red flag for a potential business lender. With only one return, they won’t be able to get a pulse on your business to make important judgments about your cash flow, revenue, and other factors essential to determining your potential to pay back your loan. Which goes to show why it’s so much harder to get approved for a loan as a sole proprietor, which files only one tax return.

General Sanity Preservation

If all of this sounds maddening, overwhelming, and potentially a little frightening, it is. If you’re a serious entrepreneur—or even a casual one—there’s no reason to put your personal assets, credit score, and precious time at risk. Especially when creating a distinct home for your business finances is a lot easier than you might think.

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The One Easy, Essential Step to Separate Your Business Finances

Hopefully, you’re convinced of the importance of parsing out your businesses and personal finances. But what do you actually need to do in order to keep ’em separated?

It’s certainly tough for many entrepreneurs to figure out what financial tools their company needs. But in order to start establishing independent business finances, you really only need to begin with one thing: a business bank account. It’s up to you whether to decide to open a business checking or savings account. But we’d recommend starting with a business checking account, since it’s the cornerstone of any company’s financial foundation. 

How to Set Up a Business Checking Account

With a dedicated business checking account, you can pay bills, deposit cash, collect invoice payments, and buy equipment without having to run a cash-only operation, or by having to pull from your personal bank account. Here are two fantastic options to kick off things—and you can even apply to open them literally right now to get it done.

If Your Business Doesn’t Deal In Cash: Azlo Business Checking

If you’re a primarily digital operation, Azlo Business Checking should be your first consideration.

Created specifically with freelancers and LLCs in mind, Azlo is a business checking account operated entirely online. That means there aren’t any physical branches, but there is a network of participating ATMs from which you can withdraw cash, and you can issue both digital and physical checks, too. The account is backed by BBVA Compass Bank, so it’s FDIC insured like a traditional bank.

Azlo’s simplicity is its biggest asset for sure: Its signup is insanely easy, there’s no minimum deposit required, and no monthly fee, either. So, if you’re cool with a totally online banking experience, there’s essentially no reason not to open an Azlo account circa now.

Bonus: Azlo hooks up into lots of business accounting software, too, which you’re certainly going to get, right?

If You’d Prefer a Physical Bank Branch: Chase Total Business Checking

Perhaps you do deal in some cash, though, or would prefer a brick-and-mortar bank that you can walk into for services like sending wire transfers.

If that’s the case, Chase’s suite of business bank accounts are some of the best out there. Plus, for a limited time, they’re offering an extra $200 bonus for opening a new Chase business checking account with a few additional steps.

For a first account, Chase Total Business Checking is a strong offering. With a very manageable $25 minimum first deposit, there’s a monthly fee of $15 (though $12 if you go paperless—save a tree and $3!), which is waived if you keep $1,500 minimum balance. With 100 monthly fee-free transactions and $5,000 of cash deposits, this suits most small business owners’ needs.

The Next (Also Simple) Step Is a Dedicated Business Credit Card

You might be all set with a business bank account. But if you’re also putting business expenses on a personal credit card, then you’re not done yet. The same principle applies here—if you’re not separating your company expenses on a dedicated card, then you’re not really distinct.

Why Establish a Business Credit History

You likely know all about your personal credit score, which helps you get credit cards, loans, mortgages, etc. But as an entrepreneur, you get a separate business credit score for your commercial operation. And it serves much the same function: a numerical history of your responsibility with debt as a business, measured on a different scale.

This is a substantial thing for a business owner to build, especially if you see your business getting any bigger—whether that’s expanding to a larger space, opening more locations, getting a higher line of credit, and doing any of this with business financing.

A business credit card is the absolute best place for you to begin building that business credit score. Here are a couple of ideas where to start with your first card:

A Great Business Credit Card for Newer Businesses: Amex Blue

The American Express Blue Business Plus is a great fit as a first business credit card for many business owners—and it truly might be the only business credit card you’ll need. First, the Amex Blue has a 15-month 0% introductory APR period, which means no interest on purchases for more than a year. That’s the longest period we’ve ever seen. After that, a variable interest rate sets in depending on the market Prime Rate and your creditworthiness.

In addition, the card has no annual fee, and you can earn reward points redeemable for travel, gift cards, and lots more. It’s a great, versatile card—but especially for that 0% intro APR offer, which could allow you to make some big investments into your business without being on the hook for them immediately.

The Best Business Credit Card for Building or Rebuilding Credit: Spark Classic

Even if you’re in a position in which you need to build or rebuild credit, you still don’t have an excuse not to be putting your business purchases on a separate card. The Capital One Spark Classic for Business card has a lower barrier to approval than the Amex Blue (550+ credit score), but still allows you to both build business credit and earn a flat 1% cash back on all spending. And with no annual fee, this card is an easy choice for so many.

You can also take a peek through our business credit card picker to find a specifically well-matched card for you.

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When You Should Separate Your Personal and Business Finances 

Yesterday. But since that’s admittedly not a helpful answer, you should know by now that you’ll want to do it as soon as possible. And it’s never too late.

How to Parse Out Your Cash If It’s All Lumped Together

If things are all tied up, you can separate them and start fresh. Once you’ve set up a separate bank account, Billie Anne Grigg, owner of Pocket Protector Bookkeeping, recommends taking this course of action with funds that are currently tied together:
Download your bank statements for the year into a CSV or Excel format. Then, go through the statements line by line, and note next to each deposit and expense whether the transaction was business or personal. Doing this in a CSV or Excel file will let you quickly group all your business and personal transactions together, and your accountant can use this information to make the necessary adjustments to your tax return or bookkeeping file.

Set Up a Recurring Transfer to Help with Structure

Grigg also says that discipline is the other key piece to making sure you keep up the good work—meaning don’t sway the opposite direction and start dipping into the business account for personal matters. She recommends clients “reverse-engineer a ‘paycheck’ (for sole proprietors, this is in the form of a draw from the business) based on their household financial needs.”

Even if it’s only a little bit, it’ll help prevent you from paying for personal expenses from the business.

Now, Run Your Business—What You Do Best

The nice thing about getting this done? Just that—it’s done. Now, you can just worry about running your business without these nagging worries in the back of your mind.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Meredith Turits

Contributing Writer at Fundera
Meredith is a writer and editor. Drawing on her background in small business and startups, she writes on business, finance, and entrepreneurship. Her writing has also appeared in the New Republic, Rolling Stone, Vanity Fair, ELLE, The Paris Review Daily, and more.

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