7 ways to separate business and personal finances

To keep your company’s finances clear and organized, it’s important to separate your business and personal finances. Combining the two can cause accounting mistakes, create cash flow confusion and even reduce your personal liability protection in the event of a legal issue. Having a dedicated business account helps with accurate bookkeeping and tax compliance and sets your business up for a financially successful future.

Read on to discover different ways to keep your accounts separate. 

What you’ll learn:

• Separating your business and personal finances can simplify the accounting process, protect your personal assets and give you an accurate picture of your company’s cash flow. 

• Some ways to separate your business and personal finances include establishing a formal business structure, using dedicated accounting software and creating an expense-tracking system.

• You can also open financial accounts in your business’s name—such as a business bank account, a business credit card or other types of credit through suppliers or vendors.

There are a few reasons to keep your business finances separate from your personal finances, such as:

• Providing an accurate picture of your business’s cash flow: When personal and business funds are mixed, it’s difficult to tell which transactions belong to your company. Separating your accounts allows you to review a single statement showing how much your business is earning and spending at any given time. 

• Protecting your assets: Depending on your business structure, if legal action is taken against your company, your personal assets may be off-limits. Forming a corporation, limited liability company (LLC) or partnership establishes your business as a separate legal entity and offers varying levels of liability protection. This separation helps prevent your personal and business assets from becoming commingled during a legal dispute. On the other hand, a sole proprietorship doesn’t offer the same protection because it’s not considered a separate entity.

• Helping establish business credit and credibility: Having separate accounts that report to the business credit bureaus can help establish and build a credit history for your company. To access credit, lenders and suppliers might require a certain business credit score, which reflects how creditworthy your company is. Plus, operating under a separate business account can show potential suppliers, partners and clients your organization is credible and established. 

• Simplifying the accounting process: Using a separate business account can make tax time simpler and more efficient. That’s because having a checking account reserved for your business keeps all your company’s income and expenses in one place, making it easier to find the information you need to file accurate tax returns. 

Here are ways to keep your personal and business finances separate:

Setting up your company as a legal entity helps protect your personal assets from being subject to business debts or lawsuits. There are different structures, such as LLCs, C corporations and S corporations, and the filing requirements vary depending on the state. That’s why it’s recommended to work with a legal expert to determine the best structure for your company.

Using reliable accounting software is one of the most effective ways to keep your business and personal finances separate. Certain platforms can help you stay organized via features like income and expense tracking and transaction monitoring. Many also enable you to classify your expenses as personal or business to help avoid confusion. From there, you can generate financial statements and reports, simplifying the accounting process.

One straightforward way to prevent your business and personal finances from commingling is by opening up a checking account specifically for business use. By using your business bank account solely for company transactions, you can gain an accurate view of your income and expenses and simplify tax time since everything is in one place.

Applying for a business credit card and using it strictly for company purchases is another effective way to keep expenses separate. You can use your business card to track expenses and control spending. Plus, certain business credit cards offer rewards, which means you can earn cash back or miles on company spending. When you’re determining whether to get a business credit card, research various card options and benefits to find the one that best fits your business needs. 

If you use personal assets for business purposes—or business assets for personal use—it’s important to have a reliable system for tracking expenses. For example, if you use your personal car to make business deliveries, track this mileage separately and keep detailed records. If you have physical receipts, you can store them in designated folders for business and personal use. For digital receipts, you can organize them into separate email folders to keep everything easy to find.

You can apply for credit with a supplier or vendor to create new opportunities and help build a positive business credit history. For example, many retailers, suppliers and vendors offer trade credit with payment terms that vary between net 10 to net 60 days. With this type of payment arrangement, you can postpone payment for 10-60 days on the purchase of products and services that support your business.

Identify how much you need to earn each month and commit to maintaining that amount. Write yourself a check or transfer funds from your business checking account to your personal account, and treat it as you would a paycheck from an employer. Taking a regular salary can prevent you from tapping into business funds, as you are providing yourself a consistent stream of income.

As your business grows, taking the necessary steps to separate your company and personal finances can help set your organization up for long-term success. Establishing business-only accounts can make it easier to track expenses accurately and gain a clear snapshot of your company’s cash flow, allowing for more-informed financial decisions. There are several effective ways to separate your accounts, such as forming the business as its own entity or opening a dedicated company checking account.

Another way to separate your accounts is to apply for a business credit card that you plan to use strictly for company purchases. Certain business credit cards come with additional benefits like expense tracking, security features and rewards on everyday business spending. Compare business credit cards from Capital One and get pre-approved today—without impacting your credit scores.