To protect personal assets, organize business finances, simplify accounting, and avoid future tax problems, business owners should not commingle personal and business funds.
New business owners are often unfamiliar with the process of separating business and personal finances, so we’ve created this step-by-step guide to help you manage your business finances effectively.
Step 1. Get an Employer Identification Number
The process of separating personal and business finances often starts with protecting your personal assets by getting an employer identification number (EIN). You can use this nine-digit number when establishing your business entity type, applying for business bank accounts and credit cards, and filing your business’s income tax return or payroll tax return.
If you have your EIN, you won’t have to use your social security number (SSN) for business purposes. Using an EIN ensures your business accounts are associated with your business information. You can apply for and receive an EIN online through the IRS website.
Step 2. Register Your Business Entity
The next step to ensuring that your business and personal finances are kept separate is to formally establish your business as a separate legal entity. Registering your business as a limited liability corporation (LLC), C corporation (C-corp), or S corporation (S-corp) can help protect your personal assets. This means that you won’t be held personally liable for business debts and other business-related legal issues.
Step 3. Open a Business Bank Account
Opening a business bank account is essential for separating your business and personal finances. If you use your personal bank account for business, it can complicate bookkeeping, and you also risk facing tax issues later on. Having a separate business bank account can help you manage your funds more efficiently.
Open a Business Checking Account
Business checking accounts are tailored to business owners and come with valuable features. These accounts can be used to pay expenses such as rent, utilities, supplies, and payroll. The best checking accounts for small businesses are inexpensive to maintain and easily meet your business’s needs. Depending on your preference, you can open a business checking account at a traditional bank or an online-only bank.
Here are five of the best small business checking accounts for 2021:
Bank | Who it’s best for | Monthly fee |
|---|---|---|
Business owners who want to earn a big introductory bonus | $16 | |
Businesses that have low monthly deposits | $15 | |
Business owners that need unlimited transactions | $15 | |
Businesses that don’t handle cash transactions and want free ATM use | $0 | |
Businesses that need scalability and access to investment services | $10 |
Open a Business Savings Account
A business savings account offers a secure place to save for future business expenses and emergencies. To ensure that you don’t mix your personal money with your business funds, it’s always a good idea to open a business savings account along with your business checking account. The best business savings accounts offer a large return on your deposits, charge fewer fees, and are easily accessible.
The following are five of the best small business savings accounts for 2021:
Bank | Who It’s Best For | Annual Percentage Yield (APY) |
|---|---|---|
Business owners who prefer to bank online and earn a fixed APY on all balances | 0.60% on all balances | |
Businesses that don’t process cash deposits and can save at least $25,000 | 0.50% on balances of at least $24,000 | |
Business owners who want to maintain both their business checking and business savings accounts in an online-only bank | 0.50% on balances of up to $10 million—0.35% on balances above $10 million | |
Businesses near a Capital One branch that prefer to earn a high introductory APY | 0.40% for the first 12 months—standard variable rate thereafter | |
Business owners and startups that want easy online banking with no fees | 0.40% on all balances |
Step 4: Apply for a DUNS Number
A Dun & Bradstreet number (DUNS number) is a unique nine-digit identifier for businesses. A DUNS number allows you to build a business credit identity that is totally separate from your personal credit. Lenders, creditors, and potential investors will often need your business’s DUNS number to help them check the reliability and financial stability of your company as well as other financial health indicators.
Step 5. Apply for a Business Credit Card
Business credit cards allow you to monitor your business expenses as well as business-related purchases made by employees. Getting a business credit card is essential, especially if you want to start building your business credit. Many credit card issuers offer perks and features that are useful for businesses, including higher credit limits and lucrative rewards. The best small business credit cards offer a low annual percentage rate (APR), low annual fees, enticing rewards, and additional benefits.
Here are five of the best small business credit cards available:
Credit Card | Best for | Annual Fee | APR |
|---|---|---|---|
Earning 2% cash back on all purchases | None | 13.24% to 19.24%—Variable | |
Earning cash back on large purchases | None | 13.24% to 19.24%—Variable | |
Business owners with fair credit | None | 26.99%—Variable | |
Extended 0% APR period on purchases and balance transfers | None | 11.99% to 17.99%—Variable | |
Premium travel rewards and luxury travel perks like airport lounge access | $595 ($695 if application is received on or after 1/13/2022) | 14.24% to 22.24%—Variable |
Step 6. Establish Utility Accounts Under the Company’s Name
Whenever possible, set up your business utility accounts under your company’s name. This includes all utility services and other regular expenses that you need to operate your business, such as phone lines, mobile service, internet service, leases, and other business-related subscriptions. Make sure to pay for these services using your business checking account or business credit card.
Step 7. Track Your Business Expenses & Keep Your Receipts
Keeping a good financial record is important if you want to separate your business and personal finances. Monitoring all your business expenses will make bookkeeping a lot easier. Use your business credit cards for business-related purchases and store your receipts safely. To avoid getting into trouble with the IRS, don’t mix your receipts for business purchases with your receipts for personal expenses.
Step 8. Put Yourself on Payroll
Don’t forget that you are also working for your business and paying yourself a salary is not only fair but necessary. You also have personal bills and obligations to take care of, and you wouldn’t want to take money from your business account to pay for your personal needs. When you pay yourself a salary, you formally delineate between your business finances and your personal finances—it can help you avoid using your business funds for personal expenses.
Step 9. Monitor Business Use of Personal Items
If you use personal items for your business—for instance, your home office or car—you’ll need to track usage carefully. Document how often you use your home office and, if possible, find a way to account for the electricity and internet services used for business purposes. You’ll also need to document whenever you use your car as a business vehicle. Business use of personal items can be tax-deductible.
Step 10. Apply for Credit Under Your Company’s Name
When applying for credit with a supplier or vendor, use your company’s name and information on the credit application. This will help your business establish a credit history. The same goes for applying for a business loan or a line of credit from banks or lenders.
Step 11: Educate Employees & Business Partners
Another important step to ensuring that you keep your business and personal finances separate is to educate your employees and business partners. To reduce mistakes and avoid risks, create a policy that clearly defines how to process and report business expenses properly. This policy should also address how to process payments properly and correct purchases that are erroneously charged to your business. Educating all stakeholders will keep everyone on the same page.
Why Is Separating Business and Personal Finances Important?
Separating business and personal finances makes it much easier to track expenses and keep your business records more organized. You will also avoid getting into trouble with the IRS and risking your personal assets for business-related liabilities. You can also build business credit, which is necessary when applying for business loans. Moreover, it’s essential to set up business bank accounts and business credit cards to keep your finances in order and maintain healthy personal and business boundaries.
Bottom Line
It’s crucial for any business to maintain a clear boundary between personal and business finances. Failure to do so can lead to risks and complications that can put both your company and your personal life in jeopardy. Whether you’re planning to open a new business or already own one, you can use the above steps as a guide to ensure that your business and personal finances are kept separate.
