How to Separate Your Business and Personal Finances in 9 Ways

When running a business, learning how to separate your business finances from your personal finances should be your first priority. Learning how to separate your business finances from your personal finances is key to simplifying tax preparation, building business credit, and accurately and effectively evaluating your business’s performance. Getting ahead of the curve on this will save your business time and money in the future.

If you’re a new business owner or a current owner and you realize you need to keep separate records, check out the step-by-step guide I’ve included below to learn what you need to do to keep your business and personal finances clearly separated.

Step 1: Get an Employer Identification Number (EIN)

I would recommend getting an EIN from the IRS first. An EIN is a unique nine-digit identifier that the government uses to identify businesses for tax and federal purposes. Having one helps establish your business as a completely separate legal entity. Getting an EIN is a free and relatively painless process that saves you a ton of time on the back end when it comes to making sure your business is legally separate for important future processes like tax filing and business banking.

Why do you need an EIN?

An EIN distinguishes your business from you, ultimately establishing a separate legal entity for it, which will be crucial for common business processes:

• Legal separation: An EIN helps organize your business as legally separate from you. This helps prevent your personal assets from being mixed with your business liabilities.
• Tax purposes: With an EIN on hand, your business can file taxes separately from your personal tax returns when tax time comes.
• Business Banking: Banks now require an EIN to open a business bank account. Having one allows you to maintain a separate bank account for your business.
• Employee management: An EIN is needed to report employment taxes and handle payroll. Having an EIN also helps establish your business as a legal employer.
• Building Business Credit: An EIN is required to establish credit in your company’s name, separate from your personal credit records.

Step 2: Register your company

The next step I would recommend is to formally register your business. This can take the form of a sole proprietorship, LLC, S-corp, or C-corp. Registering your business is an important step in protecting your personal assets in the event of any legal action taken against your business. Keep in mind that this protection can disappear if you combine your personal and business funds. Therefore, it is wise to consider separating your personal and business funds to avoid these issues.

Step 3: Open a bank account for your business

Once you have registered your business, I recommend opening a business bank account. A business bank account provides clear records of your business income and expenses and ensures smooth operations during the accounting period. Having a business checking account for your business also keeps your accounting and financial management under control.

When you open a business bank account, make sure that all of your business income is deposited into the account and that all of your business expenses are paid from the same account. This clear division makes it easier to ultimately document and manage your business finances. For help managing your business bank accounts, check out the best bank reconciliation software .

Step 4: Get a DUNS Number

Next, I would recommend getting a DUNS number from Dun & Bradstreet so you can be sure that you have formally established your credit profile as a business.

The importance of having a DUNS number

Creditors use the DUNS number to determine your business’s creditworthiness. It provides insight into the health of your business and your overall credit profile. Your business’s credit profile is key to determining whether you will be able to secure future loans and lines of credit. Establishing a strong business credit history is key to ensuring that your business grows and achieves financial stability.

Step 5: Get a credit card in your company name

Business credit cards help you build a credit history for your business that is separate from your personal credit history. By using business credit cards for business expenses, you are not only building your credit history for your business, but you are also further separating your personal and business transactions.

This breakdown is important for accurate financial reporting and building a solid credit history for your business, which can help you obtain better financing terms and diversify your lending options in the future.

Step 6: Set up utility accounts in your company name

Another way to help with business credit is to set up service accounts under your business name. Service accounts include business subscriptions and other related business features, such as phone bills, Internet services, and software licenses.

Mark these services as payment services under your company name and make sure the bank account you set up for your business records these expenses for your accounting software.

Step 7: Track your business expenses and keep receipts

One thing I would like to emphasize is the importance of expense tracking software when it comes to separating your business and personal finances. I believe it is crucial for your business to have an expense tracking software or system that helps you track your expenses and invoices to get an accurate picture of the cash flow actually going into your business.

Benefits of tracking expenses

Tracking expenses ensures that your business maintains clear, simplified records for tax purposes. There is nothing worse than searching for every last expense and receipt and not having anything at tax time. This can impact or even delay the preparation of your tax return and ultimately cost you money. Don’t put yourself in this situation.

The best way to avoid finding yourself in this situation is to ensure that your employees are using business expense tracking software and are trained in it. Keeping detailed accounts also helps with future compliance and audit readiness.

Step 8: Put yourself on the payroll

Paying yourself a salary from a business account is a key step in maintaining a clear division between personal and business income. This practice simplifies accounting and ensures that your personal finances are separate.

Taking your salary from a business account can help you create a predictable income stream and avoid the pitfalls of mixing business and personal funds. For more information on setting up a payroll account, read on.

Step 9: Monitor the use of personal items in your business

Finally, I recommend keeping a detailed record of the business uses of your personal assets for accurate tax deductions. This includes keeping a record of assets such as home offices or vehicles used in the management and maintenance of your business.

Documenting business use cases

Making sure you keep accurate records of assets you use will help come tax time. Keep detailed records of your home office expenses and use a mileage tracking app to track your business use of your vehicles. These records can help reduce your business tax bill come tax time and are a great way to make sure you have the documentation on hand to comply with changes in tax laws or future business audits.

Why it’s important to separate your business and personal finances

Separating your business and personal finances is key to financial transparency, accurate tax filing, and legal protection. It helps you maintain a clear picture of your company’s true financial health.

Clear financial boundaries also simplify accounting, prevent commingling of funds, and reduce the risk of legal issues related to inaccurate financial reporting. All of this adds up to fewer headaches for you as you grow and build your business.

Recommended Business Bank Accounts to Separate Your Business and Personal Finances

Choosing the right bank account for your business is essential to keeping your business finances separate. Here are a few options I would choose:

	Monthly fee	Free monthly transactions	Annual Percentage Rate (APY)	Free Cash Deposit Limit
Bluevine Business Checking Account Provider is an FDIC-backed and insured fintech platform through a banking partnership with Coastal Community Bank.	Thread	No limit	2.0% on qualifying balance of $250,000 or less	$4.95 per deposit (Green dot)
Chase Business Full Banking Member FDIC.	$15; bearable	20	Lack	$5,000 per month

Frequently Asked Questions (FAQ)

Is it important to separate personal and business finances?

Yes, it is very important to separate your business and personal finances. There are certain financial and tax protections for your personal finances if your business finances are kept in a legally separate account. However, these protections can be lost if you do not properly separate your business and personal finances.

Can I use QuickBooks to manage my personal and business finances?

Yes, I would actually recommend using QuickBooks for both your business and personal finances. Just make sure you don’t mix the two. QuickBooks can be helpful for budgeting and managing bills, and it also makes it easier for you to keep separate files since QuickBooks can do some of the paperwork tracking for you.