Your business is a separate entity from your personal life. Even though you may have used your personal assets to start a business, it’s important to set a clear boundary between your business and personal finances, even during your business’s early stages. This article lists key expert tips for keeping or stopping your funds from commingling.
Here are 25 tips to keep business and personal expenses separate:
1. Create a Separate Entity for Your Business
Gabriel Pincus, President and Founder, GA Pincus Funds
The first step when you want to keep business and personal expenses separate is to ensure that your business expenses are kept separate from your personal expenses is to register your business as a separate entity. You may register your business as an LLC (Limited Liability Company) or something similar. Then you should get an EIN (Employee Identification Number) for your business. This can be done for free on the IRS website.
For more information on the different small business entities, read our article on LLCs, S-Corps, and C-Corps.
2. Open a Separate Business Bank Account
Greg Corey, Founder and Principal, Porchlight
As a business owner, it’s important to have two separate bank accounts – one for your personal expenses and the other one is for your business. However, it would be better to open a business bank account with a different bank from where you maintain your personal bank account with. This way, you won’t be tempted to transfer funds from your personal account to your business account, or vice versa.
3. Hire A Reliable and Trustworthy Bookkeeper
Mark Aselstine, Founder, Uncorked Ventures
Keeping your business and personal finances can be very challenging especially if you only do this on your own. This is the reason why it’s a great idea to hire a good and reliable bookkeeper to help ensure that you don’t mix your business and personal expenses. Make sure that your bookkeeper has a keen eye and is trained how to spot small errors immediately.
4. Use Accounting Software for Your Business
John Kinskey, President & Founder, AccessDirect, Inc.
An accounting software like QuickBooks will help you track your business’s income and expenses, monitor your financial transactions, and generate statements. By using a reliable accounting software, it would be easier for you to ensure that your business expenses are not mixed with your personal expenses.
For more information, check out our article on the best small business accounting software.
5. Maintain Separate Online Accounts for Your Business
Dave Robinson, Founder & Managing Partner, Driven Insights
Even during the early phases of your business, it’s a wise idea to maintain separate online accounts that are solely intended for your business. Accounts such as PayPal and Amazon – if you intend to buy business-related stuff online – must be created separately for your business. This will clearly create a record on which online transactions are done for business purposes only.
6. Monitor the Costs of Personal Items for Business Needs
Grant van der Harst, Managing Director, Anglo Liners
If you regularly use your personal items for business needs, such as your car or phone, make sure to keep track of how much this will cost you. The best method of keeping a hold of what you are spending on the business is to log your expenses. Keep receipts for the cost of gas used for business travel and the cost of business calls.
7. Loan Personal Money to Your Business Only When Necessary
Katie Hellmuth Martin, Co-founder, Tin Shingle
Are you financing your business from your personal funds? You may do this only when necessary – but you have to ensure that you loan the money to your business and log this to your accounting software as a business loan. Monitor how much your business has borrowed from your personal funds, and ensure to set a strict payment timeline for your business to pay the money it owes to your personal account.
8. Use a Business Credit Card For Business Expenses
Deborah Sweeney, CEO, MyCorporation.com
If you are a small business owner, it’s absolutely necessary to use a separate, small business credit card intended only for business expenses. This makes it easier to track spending and keep personal and business expenses separate for write-offs related to business expenses. It also allows you to build credit for your business that is independent of your personal credit and helps address potential issues of fraud.
For more information, check out our article on the best business credit cards.
9. Provide Employees With Pre-Paid Business Debit Cards
Lou Friedmann, Chief Revenue Officer, Bento
As a business owner, you want to ensure that you and your employees keep personal finances separate from business finances, and you want to prevent people from overspending. However, many businesses let employees use personal credit cards for business-related expenses, which can be time-consuming and difficult to control. To avoid this, you can provide your employees with pre-paid business debit cards which the company can use to track and control overall spending–ensuring business and personal expenses are separate and enabling your business to easily control and track all employee spending.
10. File Your Receipts & Bills Into Separate Categories
Kevin Huhn, Founder & Inspirational Speaker, Kevin Media
Separate your business-related receipts and bills, and categorize each according to which type of expense they are, such as telephone bills, utilities, payroll, office supplies, travel expenses or gas. It’s best to file them in separate folders with corresponding labels. This will make it easier for you to keep track the expenditures you spend on your business.
11. Use the “Class” Feature in Your Quickbooks to Record Personal Expenses
Daniel Passov, President, Greek U Inc.
If you cannot qualify for a business credit card yet, you may use your personal credit card for your business provided that you categorize these expenses properly. You can do this by using the “class” feature in Quickbooks, which is used to separate expenses for a company that has two locations. Instead, you can use it to post personal expense to have a separate monitoring for both personal and business expenses.
12. Pay Yourself as an Employee
Jeff Groesbeck, Founder, Impact Martial Arts
Even if you are the business owner, you should pay yourself as an employee, especially if you manage your business. You should be a regular part of your business’s payroll. This way, you can have the funds and budget for your personal finances. If you don’t pay yourself, you might end up using your business funds for your personal expenses.
13. Stick to Your Business’s Budget
Steve Pritchard, Business Consultant, GiffGaff
Set a strict budget for your business and stick to it. All too often, small business owners make the mistake of allowing themselves to go over budget, which then requires them to tap into their personal finances to keep the business afloat. However, all this does is blur the lines between personal and business expenditures. Setting a clear budget that is based on your company’s current earnings will help you to keep your personal and business finances separate.
14. Use Cash for Your Personal Expenses
Cristian Rennella, CEO & CoFounder, elMejorTrato
If your business is relatively new and opening a business bank account is not yet feasible, you may separate your personal finances by using cash for all your personal and family expenses. This way, all your banking transactions, such as check issuance and credit card usage, are business-related expenses, making it easier to track.
15. Immediately Reimburse Personal Money Used For Business
Blake Snow, Author, Log Off
It’s important to have a separate bank account and credit card for your business. However, in case you forget to bring your business credit card and you need to spend for a business-related expense, like a business lunch with a client, for instance, you should immediately reimburse yourself the amount you used from your personal money, and this reimbursement must be supported by receipts.
16. Document How Much You Invested in the Business
Paola Garcia, Small Business Advisor, Excelsior Growth Fund
You should avoid commingling your personal money and your business funds. However, sometimes you have no other option but use your personal funds for business expenses, especially when your business is new. When this happens, keep a record of and the receipt for every expense you paid out-of-pocket. It’s important to document how much personal money has been invested in the business as this shall form part of your investment.
17. Have Your Tax Filed By a Licensed Accountant
Alexis Chateau, Founder & Managing Director, Alexis Chateau PR, LLC
Hire a licensed and experienced accountant to file your business taxes, preferably a CPA. This ensures that your business’s financial records are error-free and not mixed with personal expenses. This provides you with the assurance that you get every business write-off available to you. The cost of hiring an accountant is worth your peace of mind when it comes to filing taxes.
18. Invest in Assets Intended Only For Business Use
Kevin May, President, LandHub.com
One thing you could do to separate your business from personal finances is to have separate items intended for business use only. For example, you should buy a separate phone for your business if you constantly need to make business calls. If your business requires you to travel often, then invest in a separate car for business use. This way, you can clearly identify the expenses used for business.
19. Hire a Finance Manager or Controller
Kirk Herzog, Office Manager, Expert Plumbing & Rooter, Inc.
To ensure that your business and personal expenses don’t mix, you can hire a finance manager or controller to act as a gatekeeper on your business’s finances. This personnel acts as a ‘maker’ for all expenses, while you, as the owner, act as the ‘checker’ or ‘approver’. This way, there are two sets of eyes to scrutinize that your business expenses are really business-related and that they are paid out of business funds.
20. Do Not Use Business Funds to Pay for Personal Expenses
Anna Wood, CEO, Brains Over Blonde
Your new business is an investment that you need to protect from yourself and others. It should be treated as a separate entity from your personal life. This means that your business funds should not be used as a means to pay for your personal expenses, even if you are the sole owner of the business. Also, refrain from ‘borrowing’ money from your business accounts for your personal use.
As a small business owner, sometimes your family, relatives, or friends will ask favor from you that may affect your business. This ranges from asking special discounts, free products or services, or borrowing money from your business funds. According to American Express, it’s essential to make sure that everyone in your close circle understands that your business is a separate entity from your personal life.
If you need to multitask, Chron recommends that you track shared expenses, and as much as possible, get separate receipts. For example, you need to buy school supplies for your children and some supplies for your office. To keep finances totally separate, it’s best to ask the cashier to punch the items separately, paying for the office supplies with your business credit card and the school supplies with either cash or your personal credit card.
According to IRS Publication 535, travels, meals, and entertainment should be directly related to or associated with your business for these expenses to be tax deductible. Sun National Bank recommends that you keep business lunches and other work activities separate from events with friends and family to avoid confusion.
For more information, read our article about travel and entertainment expenses.
It’s important to keep a financial record for everything you spend – both business and personal expenses. This is essential for tax reporting purposes. Old National suggests that you should record every expense you make – either for business or personal – so you can keep track of your finances and see if you are spending within your means and budget.
25. Rent Space to Your Home-Based Business
If you are a home-based business and are using part of your home as an office location, you can rent this space to your business. You may create paperwork that documents the terms and conditions of this rental agreement, and you can charge your business a reasonable amount as rent for using a space in your home.
Bottom Line – Keep Business and Personal Expenses Separate
As a small business owner, you may find it difficult to draw a clear line between your business and personal finances. However, it’s necessary to keep business and personal expenses separate if you want to accurately track your business’s performance. Make sure to remember these 25 expert tips every time you’re tempted to mix your finances.