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In this guide, we’re going to show you how to separate personal and business finances so that you can avoid all of these issues and operate your business with peace of mind. What’s more, keeping personal and business finances separate will require you to maintain some practices that are just good business.
Separating business and personal finances is a multi-step process that many first-time business owners are unfamiliar with. To help you get started, we’ve created step-by-step instructions. No matter what kind of business you operate, you’re going to want to do these things to ensure your business and personal finances stay separate.
The first step in separating business and personal finances is getting an employer identification number (EIN). An EIN is a nine-digit number assigned to your company by the IRS, and you use it when filing your business’s income tax return or payroll tax return, establishing your business entity type, opening a business bank account, applying for a business credit card, and a lot more. Think of it like the business version of your social security number.
Once you have an EIN, you won’t have to use your social security number for business purposes, which helps create an initial line between your business and personal finances.
Once you have your EIN, you can set up your business entity type as an LLC or corporation (you don’t need an EIN to form a sole proprietorship). Establishing an LLC or corporation will formally establish your business as a separate legal entity. Incorporation also allows you to file your business tax returns separate from your personal tax returns, and gives your business a layer of legal protection.
The most important thing you need to start separating business and personal finances is 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.
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 off.
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: Signing up 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 need.
Open an Azlo Account Now
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. There’s a monthly fee of $15 (though $12 if you go paperless), 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.
Open a Chase Total Account Now
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. Having a business credit card also allows you to build your business credit score.
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:
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 12-month 0% introductory APR period, which means no interest on purchases for a year. That’s one of the longest periods for purchases and transfers 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.
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 (580+ 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.
Paying yourself a salary from your business creates a more formal boundary between your business finances and your personal finances. Simply take money from your business bank account and transfer it to your personal checking account once or twice per month, just as if you were working for somebody else. By paying yourself a salary, you establish when and how you will take money out of your business, rather than just pulling from your business finances whenever you need to.
Make sure that you’re not combining where you store business receipts and where you store personal receipts. If you were to be audited, the IRS would want to look at your business receipts, and if you can’t separate them from your personal receipts, you’re in trouble. Keep in mind that having a business bank account and business credit card (that you only use for business purposes) will make the whole process of separating receipts a lot easier.
If you have a home office, use your personal vehicle to attend client meetings, or talk to customers on your personal phone, you need to take note of these scenarios. Being able to track when you use personal items for business purposes will allow you to write off some or all of those expenses come tax season. So educate yourself on what are qualified business expenses and what aren’t. Then take notes and give them to your accountant when it comes time to file.
Our last step to separating business and personal finances is to make sure all business stakeholders are on the same page. If you’re separating business and personal finances, but other members of your business aren’t, it’s not going to make any difference. It needs to be a collaborative effort. So make sure everyone understands what the difference is between a business expense and a personal expense, and then work out a system to ensure that separating business and personal finances is as easy as possible.
We’ve explained to you how business and personal finances can be kept separate, but we haven’t really touched on why personal and business finances should be kept separate. The short answer is: Many reasons.
Let’s list all the issues you’re exposing yourself to when you choose not to separate business and personal finances.
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.
This brings us into the second point. Say you do lose that lawsuit. 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).
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 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 is something you definitely don’t want.
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 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.
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, as we’ve explained, is fairly simple.
You should know by now that you’ll want to separate business and personal finances as soon as possible. And it’s never too late. Here’s how to get started.
“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.”
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.
We’ve talked a lot about why separating business and personal finances makes sense, but we haven’t addressed whether or not its required.
The answer is, separating business and personal finances is required for LLCs and corporations, but not for sole proprietorships. Sole props don’t need to separate finances because they’re considered an unincorporated legal entity. This means all of the sole proprietorship’s profits, losses, and liabilities are tied to the owner.
Ironically, this means it’s even more important for a sole proprietorship to be separating business and personal finances. If you’re audited by the IRS, the burden of proof is on you to disclose your business expenses and income. Therefore, sole proprietors, more than anyone, should prioritize separating business and personal finances.
The nice thing about getting this done? Just that—it’s done. Now, you can just focus on running your business without these nagging worries in the back of your mind.