How to Separate Your Business and Personal Finances

As a business owner, you’re personally invested in the success of your business. When your work is your life, sometimes it’s natural for things to overlap. Whether you’re starting a business or already running a successful venture, it’s essential to draw a clear line between the money you use for your company and the money you use for your personal life. Keeping your finances separate also helps you maintain good financial health.

What does it mean to separate business and personal expenses?

Separating your finances means you’re treating your business like its own entity. Your business has its own money, and you personally have your own money. The two don’t mix. 

When you buy office supplies or pay for a work lunch, those expenses come out of your business funds. When you buy groceries or pay your mortgage, pay for those out of your personal funds. When you need money from your business for personal use, you pay yourself through a formal process like a salary or an owner’s draw.

Clearly separating the money creates an important paper trail. You can prove what belongs to your business and what belongs to you personally. That clarity may help you if a legal or financial question comes up, and it can help make tax time easier, too.

Why separating personal and business finances is important

Keeping your business and personal finances separate does more than keep your records clean. It helps your business grow and makes managing money easier every day. Here are 5 important reasons to consider.

Reason 1: To protect your personal assets and limit liability

Legally separating your business from your personal finances helps protect your personal assets. If your business faces a lawsuit or can’t pay its debts, creditors typically can’t go after your personal savings, home or car. But, if you mix your finances, a court might decide your business isn’t actually separate from you. This may increase the risk that personal and business assets are treated the same, potentially putting personal assets at risk.

Reason 2: To access business financial accounts and credit cards

Many business accounts offer features you can’t find in personal accounts. You can often get perks like higher transaction limits, payroll management tools, expense tracking and rewards on business purchases. Business accounts also help you present a professional look to your clients and vendors.

Reason 3: To track your cash flow and financial performance

When business expenses are covered by business accounts, you can see exactly how your company is doing. You know what’s coming in, what’s going out and where your money goes each month. This helps you offer products and services that are profitable, reduce high expenses and plan to cover your costs during slower seasons. 

Reason 4: To build credit history for your business

Your business can build its own credit score separate from your personal credit. If your card issuer reports to business credit bureaus, you can build a credit history based on the activity in your business accounts. That may help you qualify for better financing options and higher credit limits. Over time, you might qualify for funding based on your business credit history alone, without needing to use your personal credit history.

Reason 5: To help simplify your taxes

Separate accounts can make tax time simpler. Your business transactions will already be organized in one place. You’ll be able to more easily spot business deductions you’re entitled to. You have receipts and statements that support your business-related expenses. And, if you face an audit, you can quickly provide accurate financial records.

How to keep business finances separate

You’ll need to take a series of steps to separate your personal finances from your business finances.

Choose the right business entity structure

Your business structure impacts issues like your legal protections and taxes. 

• A sole proprietorship is the simplest option, but it offers no liability protection. Your personal assets will be at risk if you face any financial or legal issues. 
• A limited liability company (LLC) creates a separate legal entity that may help protect your personal assets from business debts and lawsuits. 
• A corporation (S-corp or C-corp) offers the strongest protection and can provide tax advantages, but it requires more paperwork and legal compliance.
• A partnership is a “pass-through” entity, meaning that instead of paying income taxes itself, each partner pays taxes on the business income. Each partner may be held personally liable.

Speak with an accountant or attorney to understand what structure best fits your needs.

Get an employer identification number (EIN)

An EIN is like a Social Security number (SSN) for your business. The IRS uses this 9-digit number to identify your business for tax purposes. You need an EIN to open a business bank account, hire employees and file business tax returns. 

Getting an EIN is free and takes only a few minutes to apply for on the IRS website. Once you have it, you can use it instead of your personal SSN for business transactions.

Open a business bank account

A business checking account is the foundation of financial separation. It’s the hub for your business’ cash flow and makes it easier to manage your business finances. You can pay bills, deposit checks, set up Automated Clearing House (ACH) payments and more. 

Look for a business checking account that fits your needs. Learn about any monthly fees you might have to pay, any minimum balance requirements you may need to meet, potentially favorable interest rates and available features like online bill pay or accounting software integration. 

Use your business account only for business expenses. Don’t use it for personal purchases, and don’t deposit any of your personal money into it unless making formal owner contributions. 

Pay yourself a salary

When you need money for personal expenses, you need to follow a formal process. You have 2 main options:

• An owner’s draw means you take money out as needed, but you track it carefully as an owner’s draw, not as a business expense. 
• Payroll means you pay yourself a regular salary with taxes withheld, just like an employee. S corporations require this method. 

Whichever option you choose, set a structure and stick to it. Decide how much you’ll pay yourself and how often. Then, document every money transfer.

Set up bookkeeping and expense tracking

You need a good system to track every dollar that comes in and goes out. You often can find a free app for business owners that can help you track income and expenses, scan receipts and generate reports. 

Set aside time each week or month to update your records. Every month, categorize your transactions, match receipts to purchases and reconcile your bank statements with your records. Review your cash flow to understand your financial position. When tax time comes, you’ll have everything organized and ready.

Common mistakes small business owners make—and how to avoid them

Even when you have the best intentions, it can be easy to slip up when trying to manage separate finances. Here are the 5 most common mistakes and how to avoid them:

• Mixing personal and business purchases. Using your business account or credit card for personal expenses creates confusion in your financial records. Keep both cards with you and make sure you use the right one depending on the situation.
• Not paying yourself formally. Taking random amounts from your business account whenever you need money creates accounting problems and tax issues. Set a regular pay schedule and amount for yourself—and stick to it.
• Skipping the bookkeeping. If you wait months to categorize your business transactions, you may forget what the purchases were for and end up missing out on tax deductions. Set a weekly or monthly routine to keep up with your paperwork.
• Having the wrong business structure. Sticking with the wrong type can leave your personal assets exposed to business debts and lawsuits, and it also could cost you more in taxes. Talk to an accountant or attorney about what business structure makes sense for your situation.
• Not keeping receipts. This can make it difficult to prove legitimate business expenses, which could lead to missed tax deductions and inaccurate financial records. Keep receipts for every business expense by taking photos or using an app to scan and organize them.

Get help separating business and personal finances

Navy Federal Credit Union offers business banking products designed to help you keep your finances separate and your business running smoothly. We work to help lower the number of time-consuming tasks to maintain both. 

When you open your business membership with us, you can use our business checking and savings accounts to manage business funds separately through mobile¹ and online banking. Our business credit cards help you manage expenses and earn rewards on purchases. 

We also offer financial education resources on many business topics and special resources for Vetrepreneurs to help you succeed. Whatever stage your business is in, we’re here to support you.