While it might be tempting to blur the lines between personal and business expenses, keeping a line of separation between the two is essential to your business’s long-term success.
Below, we’ll show you how to separate your finances. But first, let’s start with a quick refresher on why it’s important to keep a separation between your personal and business finances at all times.
Why you should separate business and personal finances
Avoid piercing the corporate veil
If you operate a corporation or limited liability company, and there is no clear distinction between your business and personal expenses, you can be held personally liable for your business’s outstanding debts.
This is known as piercing the corporate veil. Put simply, if your business is on the hook for any sum of money and the courts cannot find sufficient distance between your personal and professional finances, they may find you personally responsible for the debt, and seize your assets in order to satisfy your creditors.
To avoid piercing the corporate veil, your business and personal finances cannot be commingled in the same account. You also need to operate your business like a true corporation—meaning, for example, that you keep correctly-formatted and stored meeting records. It’s always a good idea to work with an attorney to ensure your business is set up properly and following all guidelines set forth by the IRS.
Save time and money
Keeping personal and business expenses separate will make your accounting and bookkeeping simpler and, in some cases, less expensive.
If your finances are commingled in the same bank account, paying a bookkeeper or an accountant to sift through your bank accounts to find your business transactions will end up costing you more than you really need to pay.
Keeping your transactions divided into two separate accounts will save you from being forced to pay a professional to sort them out at the end of the financial year.
Build your business credit
One of the most important tools for growth is healthy business credit. By creating a financial identity for your business that is separate from your personal financial identity, your business will build its own credit history and gain better access to borrowing power.
How to separate personal and business expenses
While separating expenses might seem cumbersome at first, it will actually make your life easier in the long run. Here are the steps you’ll need to take to separate your personal and business expenses.
Create a business checking account
This should be one of the first things you do when you start a new business, and you should get into the habit of depositing income here and paying bills from this account. If there is ever any question as to whether you are running a hobby or a business, the IRS will first look to see if you’ve opened a separate account.
Open a business credit card
If you are a new business owner, it can be difficult to get approved for a credit card, but it’s worth trying anyway—especially as your business grows. One benefit of this is that business credit cards are the only credit cards on which interest paid should be deductible as a business expense.
Pay yourself a salary
By putting yourself on payroll, making the necessary payroll deductions, and cutting yourself paychecks from your business account, you will keep your personal and business finances properly separated. It can be easy to let money slide around between personal and business accounts, but paying yourself a set salary will help maintain boundaries and ensure you’re paying the IRS their due via payroll taxes.
Note that sole proprietors, owners of LLCs, and members of partnerships are generally ineligible to receive a salary via payroll. For the sake of keeping organized, however, consider setting up your personal draws like paychecks—meaning they are always the same amount, and taken at regular intervals.
Check in with your CPA
Financial and legal needs differ from business to business. Ask your CPA if there’s anything else you should be doing to maintain a separation between your personal and business finances.
A little bit of effort spent separating your finances now could save you from a potentially devastating outcome down the line.