When starting your small business, learning how to separate business and personal finances should be one of your first goals. Separating them will help you build business credit, lend credibility to your business, simplify tax season, and assess your business performance more easily. Keeping your business and personal finances commingled can cause significant long-term problems, including potential issues with the IRS.
If you’ve been running a business for a while but haven’t separated your finances, it’s not too late. This guide will help you through the process of how to separate business and personal finances to avoid potential financial issues later.
Step 1: Get an Employer Identification Number (EIN)
If you haven’t applied for an EIN from the IRS, that should be your first step. Getting an EIN from the IRS is free, and it can be applied for online, by fax, or by mail. Even if you’re a sole proprietor or a single-member limited liability company (LLC), you can get one. If your plan is for your business to grow, then you’ll need one eventually. This will allow you to open accounts and apply for loans under your business EIN instead of your Social Security number.
See our guide on how to get an EIN if you need help in this area.
Step 2: Register Your Business Entity
The next step is to formally register your business as a legal entity, such as an LLC, S corporation (S-corp), or C corporation (C-corp). This protects your personal assets in case of legal action against the business. However, this protection can go away if you commingle personal and business funds, which is another reason to separate them.
See our comparison of LLC vs S-corp vs C-corp if you need guidance on choosing an entity type.
You can register in some states for as little as $50, while others will charge up to $2,000. The image below shows the LLC costs in each state.
Step 3: Open a Business Bank Account
You will need to open a business bank account to separate your business and personal finances. You need a business bank account because using a personal bank account for your company can complicate bookkeeping and could create tax problems in the future. While you should open a business checking account, you can also open a business savings account to earn a higher interest yield on reserve funds.
It is a good idea to choose a business bank that provides both business checking and savings products, along with other business support services. When you open your account, be sure to use your business EIN. However, there are banks that don’t require an EIN to open a business checking account if you are a sole proprietor or a single-member LLC—and you can learn more about this through our guide on opening a business bank account without an EIN.
A business checking account is ideal for day-to-day business transactions. It will allow you to withdraw and deposit funds without the low transaction limits of many savings accounts. The best small business checking accounts can support your business with its everyday financial transactions. Bank of America has a great business checking product to go with great business support services.
A business savings account is a great place to save for future business expenses. You can also earn interest on business funds you don’t need to spend in the near future. You can choose a regular business savings account, a high-yield business savings account, a business money market account, or a business certificate of deposit (CD) for your savings needs.
The best business savings accounts offer high-interest yield for your excess business finances. Live Oak Bank is our top-recommended business savings account with an excellent interest yield with a minimum balance of only 1 cent required to earn interest.
At some point, you may decide to switch business bank accounts. If you have an account that you are no longer using, close your business bank account to avoid it becoming a dormant account. Dormant accounts are turned over to the state after a certain period, which will require you to go through the hassle of recovering your funds.
Step 4: Apply for a DUNS Number
To establish a business credit score, you need to apply for a Dun & Bradstreet number (DUNS number). It is a unique nine-digit identifier that will allow you to build a Dun & Bradstreet business credit score separate from your personal credit. This allows lenders, creditors, and potential investors to check your company’s reliability and financial stability.
Step 5: Apply for Credit Under Your Business Name
Once you have a business credit identity established, you can open credit under the business name. Like when people begin establishing personal credit, a great way to establish your business credit is with a business credit card. The best small business credit cards offer a lower annual percentage rate (APR), great rewards, and other benefits.
After establishing business credit, you can apply for other types of credit under the business name. Many banks offer easy business loans that can be applied for in a matter of minutes, with approval in funding in as little as 24 hours.
Step 6: Establish Utility Accounts Under the Company’s Name
Establishing utility accounts under the business name will also help your business credit. Any regular services you need to operate your company should be in the business name. These include phone lines, mobile service, internet service, leases, and other business-related subscriptions. Use your business bank account or a business credit card to pay these expenses and be sure they are tracked for bookkeeping purposes.
Step 7: Track Your Business Expenses & Keep Your Receipts
You should monitor any business expenses. Business taxes can be complicated, but they can be made much easier if all expenses are tracked and receipts are kept. Many business checking platforms will include expense tracking as part of the app. Failure to track expenses properly could get you in trouble with the IRS. Also, be sure not to pay for personal expenses with business funds and keep business and personal receipts separate.
See our roundup of the best business expense tracker apps to find one that fits your business’ needs.
If you’ve been using one bank account for both personal and business expenses, you need to be sure which expenses fall into each category. While it can be time-consuming, the best way to do this is to download your bank statements for the last 12 months and inspect them item by item.
This is one of the bookkeeping responsibilities or something your financial professional can assist with. This will allow for proper tax preparation and help you avoid problems with the IRS.
Step 8: Put Yourself on Payroll
An important step in separating your personal and business finances is to pay yourself a salary. This earmarks those funds as your personal payment from the company for your work and keeps business owners from considering paying personal expenses with business funds. You can set aside a salary so that your personal needs and expenses are taken care of, and you can budget both your business and personal finances more effectively.
If you need help in this area, see our guide on how to pay yourself from your business. Also, you may be interested in our guide on how to do payroll, which includes an instructional video and a free downloadable checklist.
Step 9: Monitor Business Use of Personal Items
If you use personal items for your business, such as your home office or car, track usage carefully. Document how often you use your home office and try to account for any expenses you incur when you use your home office. If you use your personal internet at home, calculate how much of your monthly internet expense goes toward business use. This also applies to your personal mobile phone being used for business purposes.
Business use of personal items can be tax deductible. Be sure to consult your tax advisor for guidance throughout this process.
Step 10: Educate Employees & Business Partners
While you should follow the steps in this guide, your business partners and employees should also read and understand it. You should create policies that clearly define how to process and report business expenses, and the policy should have steps to correct purchases incorrectly charged to your business.
As the owner, you will be responsible to the IRS if there are mistakes made by your partners or employees. As such, you have to ensure that they know the importance of separating personal and business finances.
Why Separating Business & Personal Finances Is Important
- Helps you build your business credit: When you open a business bank account, credit bureaus begin tracking credit history for your business. This will help when you need a business loan or line of credit.
- Lets you assess your business performance more easily: With your income and expenses running through a dedicated account, it becomes easier to analyze your business’s performance. Some banks even offer software to track business performance.
- Lends credibility to your business: Customers will see your business as more trustworthy when payments come from a business account instead of your personal account.
- Simplifies tax season: Tax preparation will be much easier at year-end because using a business checking account helps maintain a record of income and expenses.
- Helps you build a banking relationship: Building a banking relationship can be beneficial if you need business financing in the future.
- Allows you to accept credit card payments: Many banks offer merchant services to their customers, which allow you to accept credit card payments into your business checking account.
When To Separate Business and Personal Finances
It is critical to separate business and personal finances as soon as possible. If you are just starting your business, try to keep your finances separate from the beginning. If you have been running your business for a while with funds commingled, get them separated immediately.
A financial professional, bookkeeper, or accountant can help you through the process. It is critical for the long-term survival of your business to get and keep your business and personal finances separate.
Best Business Bank Accounts for Separating Business and Personal Finances
When you are ready to begin the process of separating business and personal finances, you will need a business bank account. Here are three excellent options to choose from when considering a new business checking account.
Bank of America and Chase are great traditional banking options, while Bluevine is an excellent online-only financial technology (fintech) company backed by Federal Deposit Insurance Corp. (FDIC)-insured Coastal Community Bank.
Free Monthly Transactions
Annual Percentage Yield (APY)
Free Cash Deposit Limit
Fundamentals Business Checking
$7,500 per month
Business Complete Banking
$5,000 per month
2.0% on qualifying balances of $250,000 or less
$4.95 per deposit (Green Dot)
For a complete list, see our guide to the best small business checking accounts.
Frequently Asked Questions (FAQs)
Yes, your business account should be separate from your personal account. You should open a separate business bank account to keep finances separate, which will help you avoid potential tax problems in the future. Also, it is OK to have your business and personal accounts at the same bank.
Not only is it not OK to mix personal and business funds and expenses, but you could also get in serious trouble with the IRS. At the least, you or your tax professional will have more work separating those funds when filing your personal and business tax returns. If you are an LLC or an S-corp, you lose personal asset protection if you commingle your finances. If you are a C-corp, it is against the law to take business funds for personal use.
If you are a C-corp, it is illegal to commingle business and personal funds. If you are an LLC or an S-corp, you could lose personal asset protection if you use business funds for personal use. This means if there is litigation against the business, they may be able to take your personal assets even if you are incorporated. This is why it is critical to keep business and personal funds separate, regardless of business size or organization type.
Separating your business and personal funds is an essential step for the growth and development of your business. Even if you are a sole proprietor or a single-member LLC, there is no reason not to separate your funds. You gain no advantages by keeping them together, and you could open up a host of liabilities and even legal issues if you don’t separate them. Separating your funds will help your business establish credit and credibility and simplify tax preparation.