Separate Your Business and Personal Finances

If you use the same bank account and credit card for your business and personal life, don’t. It’s that simple. Combining business and personal finances puts you at increased risk for tax and legal liability, business failure, and poor personal financial management.

There are many reasons you should separate the two. Here are some of the biggest:

• It’s easier to document—and defend—your business tax deductions. Good recordkeeping helps show that expenses are business deductions instead of personal expenditures and can minimize stress in the event of an audit. “There are possible Internal Revenue Service penalties in the event of improper recordkeeping for taking and tracking business expenses,” says Jana Hattey, Community Bank President at Peoples Prosperity Bank in Quincy.
• It helps you measure your personal and professional financial health. Separate records makes it easier to assess if your personal and business income and expenses are in line. “Being able to really track how you’re doing through accurate recordkeeping is part of what leads to a successful business,” says Micah Bartlett, CEO of Town and Country Financial Corporation.
• It makes customers take your business seriously. “Others will see your business as more legitimate when paying to or being paid from a business account rather than a personal one,” according to “13 Advantages of Keeping Personal and Business Accounts Separate” on Forbes.com.
• It increases your chances of getting financing or credit for your business. “Although a business owner’s personal credit will more than likely be assessed when determining whether to extend credit, it is important for you to be able to present your business financial condition to obtain business credit,” Hattey says.

Who Needs to Separate Finances

Many businesses are legally required to keep independent records because of the way they are structured. But some, especially small businesses, sole proprietors, or hobbyists, may not have to. But they should.

“While there’s nothing that would require someone that runs a hobby business or small business to have their checking account separate, they do have to have separate financial records for tax purposes,” Bartlett says. “The easiest way to do that is to keep the information separate through a different banking account and other recordkeeping. It’s really important, even for smaller businesses, when it can be tempting to run personal and business financial transactions together.”

How to Separate Finances

• First, decide which type of entity your business should be (sole proprietorship, LLC, corporation, etc.). Visit with your team of trusted advisors—your attorney, tax preparer, insurance agent, and personal banker—and determine which type makes sense for your taxes, financial plan, and personal liability protection.
• Maintain a separate checking account for business
• Get and use a business credit card for expenses
• Create a separate budget for business
• Keep a log of business expenses, especially for shared bills such as cell phone or utilities for a home office

The bottom line is “not separating your personal and business finances costs you time and money,” Hattey says. It’s worth a little bit of time up front to save you a lot of time, money, and possible liability in the future.

If you have any questions about our Business Checking products or ways to make tracking your business finances easier, compare our accounts, visit with your personal banker today, or contact us at 1-866-787-3100.