8 Quick Tips to Separate Your Personal and Business Finances

As a business entrepreneur, it might be easy to utilize your personal money for necessities in your company. Worse still, if you have only one set of accounts for both personal and business budgets, a financial problem in your company could severely affect your personal assets and vice versa. These are not practical long-term solutions and could expose you to extra risk.

If you are just starting your company, creating a business checking account can help you record your company’s expenses correctly. Separating your business and personal funds helps secure your personal assets and treats your company as an independent entity.

Not sure how to separate your business and personal finances? This article can help you do just that.

Tips to Separate Your Personal and Business Finances

The following are a few tips you can follow to separate your business and personal finances:

1. Identify your business type

If you have not already set up a separate legal structure for your company—an LLC, C Corp, or S Corp—it is always advisable to consult a legal professional to do so. Also, you must apply for an Employer Identification Number (EIN) on the IRS website—it only takes a few minutes. One of the several benefits of creating a separate legal entity for your company is the protection of your personal assets against company debts, losses, and lawsuits.

2. Set up a business checking account and get a business debit card

If you want to separate your personal and business funds, opening a checking account dedicated exclusively to your business is essential. If you use it strictly for business expenses, in addition to your business debit card , it becomes very easy to review these expenditures in detail when you file your taxes by simply looking over your bank statements.

Opening a company debit or credit card lets you stop using personal accounts for business activities and provides a simple means of separating personal from business expenses.

3. Obtain a business credit card

If you pay your bills on time, a company credit card could help you establish better business credit scores. A good business credit profile will increase your borrowing capability and enable you to qualify for reduced interest rates on business loans. Generally speaking, as a business owner, you build business credit rather than personal credit.?

4. Pay yourself a regular salary

As your own boss, formalize your position by issuing yourself a check from your business checking account each month. Move this to your personal checking account and then act as you would if employed by someone else. Regarding personal needs, keep your business checking account and credit card separate, just like you would with a former employer’s accounts—don’t use them for personal stuff.

5. Separate and maintain your receipts

By segregating your individual receipts, you show your commitment to keeping your personal and company expenses distinct. Consider using traditional folders or separate email folders for digital receipts. This practice will help you during any IRS audit.

6. Monitor shared expenses

Being a business owner has one benefit: many of your expenses are tax deductible. Bringing a prospective partner to a decent lunch to sort things out? Getting coffee for your staff stocked? Write it off. Simultaneously, resist the intention to utilize the business card for personal expenses.

Every time, you could ask a cashier to process purchases as separate transactions. Not only will separating expenses simplify things for your accountant come tax time, but it will also protect you by maintaining a clear financial record and continuing the practice of keeping receipts separate, which will save you a lot of stress down the road as your company expands.

7. Track instances when you use personal items for business purposes

Many new business owners use the same vehicle for personal and professional transport. This extends to cell phones and other items frequently used for personal and business purposes. During tax season, writing off any legally deductible expenses to maximize savings is crucial. Consult with your tax advisor to identify which expenses are eligible for deduction, understand those that are not, and establish accurate record-keeping practices.

8. Train your employees and partners

You understand the difference between a personal and a business expenditure; now, make sure that the other people involved in your company follow too. Get everyone on the same page and dedicated to similar objectives. If others help you stay disciplined, it will be easier.

Keeping everything nice and orderly should not be the primary priority. Even if you can implement a few of these ideas this year, you will save time and money during the following tax season, an audit, or even a funding search. The ideal place to start is with solid business practices,? growing through deliberate minor changes, and learning to keep your personal and company finances separate.

What are the Consequences of Mixing Your Personal and Business Finances?

We know what we should do to separate the business and personal finances. But what happens if we mix them? Let’s explore that now:

• Complicates filing tax returns: Combining personal and business funds will considerably complicate filing your tax returns. Keeping them separate will make organizing financial records for your tax advisor much more straightforward come tax season. Every time you file your taxes, you risk an IRS audit. Difficulty in segregating company expenses for the auditor could worsen already demanding circumstances.
• More exposure to personal liability: Tax considerations call for separating company and personal funds, but perhaps more significantly, for maintaining the security of personal assets. When a business is new and lacks a credit history, new entrepreneurs sometimes sign personal guarantees for loans and lines of credit. In the long term, though, the objective should be to avoid personal commitments. Establishing a solid business credit score will help you demonstrate to potential lenders that your company can repay debt.
• Increased chances to misuse funds: If you do not keep your personal and business expenses, there will be more opportunities for mismanaging money. For instance, if your company's cash flow suffers, you might easily use personal resources to cover expenses or divert corporate funds when your personal finances are low. If the IRS audits you, this puts you in a risky position and can eventually harm the growth of your company.

Mastering Financial Separation for Business Success

Your company's financial situation depends on separating personal from business funds. Consistent and disciplined tracking, accurate record keeping, and expert guidance when needed can help you properly manage your money, reduce risks, and make wise financial decisions.

Several fintech companies can help you open a business checking account . These companies will support you in making money transfers and making bill payments on time. They also offer customer support and account management tools to make sure that you separate and track your personal and business finances for the company’s long-term growth.