How to Separate Business and Personal Finances in 9 Ways

Learning how to keep your business and personal finances separate should be your first focus when running your business. Learning how to separate your business and personal finances is crucial to simplifying your tax return, building business credit, and accurately and effectively evaluating your business’s performance. Doing so will save your business time and money down the road.

If you are a new business owner or an existing business owner who finds that you need to keep separate records, you should follow the detailed guide I have prepared below to make sure you know what it takes to maintain a clear boundary between your business and personal finances.

Step 1: Obtain an Employer Identification Number (EIN)

First of all, I recommend this Get yourself an EIN from the IRS. An EIN is a unique nine-digit identifier that the government uses to identify businesses for tax and federal paperwork purposes. Getting one helps you set up your business as a completely separate legal entity. Getting an EIN is free and relatively painless, and it can save you a lot of time behind the scenes when it comes to making sure your business is legally separate for important future processes like tax filings and business banking.

Why do you need an EIN?

An EIN separates your business from yourself and ultimately creates a separate legal entity for your business, which will be very important when dealing with general business processes:

• Legal Separation: An EIN helps you organize your business legally separately from you. This helps prevent your personal assets from getting mixed up with your business liabilities.
• Tax Purposes: If you have an EIN, your business can file taxes independently of your personal tax returns when tax time comes.
• Commercial Banking: Banks now require an EIN to grant you permission open a business bank accountHaving one allows you to maintain a separate bank account for your business.
• Employee Management: An EIN is required to file employee taxes and manage payroll. Having an EIN also helps establish your business as a legitimate employer.
• Establishing Business Credit: An EIN is required to establish credit in your business name, separate from your personal credit file.

Step 2: Register your business

The next step I recommend is to officially register your business. This can be as 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 against your business. Keep in mind that this protection may be lost if you combine your personal and business funds. Therefore, it would be wise to consider separating your personal and business funds to avoid these issues.

Step 3: Open your business bank account

Once you have registered your business, I recommend that you open a business bank account for your business. A business bank account will allow you to keep clear records of your business income and expenses and ensure that things run smoothly at tax time. Having a business checking account for your business will also help you: accounting and financial management is under control.

When you open a business bank account, make sure that all the income your business collects goes into that account and all business expenses are paid from the same account. Having this clear separation makes it easier to 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 recommend getting a DUNS number from Dun & Bradstreet so you can officially establish your business’s credit profile.

The importance of having a DUNS number

Creditors use a DUNS number to determine the creditworthiness of your business. It provides insight into the health of your business and its overall credit profile. Your business credit profile is crucial to determining whether you will be eligible for loans and lines of credit in the future. Establishing a strong business credit history is crucial to ensuring your business continues to grow and achieve financial stability.

Step 5: Get a credit card in your business name

Business credit cards help you build a credit history for your business, which is different from your personal credit. By using business credit cards for your business expenses, you not only build your business credit, but you also keep your personal and business transactions separate.

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

Step 6: Create utility accounts under your business name

Another way to help your business credit is to set up utility accounts in your business name. Utility accounts include your business subscriptions and other regular business-related functions like phone bills, internet service and software licenses.

Mark these services for payment under your company name and make sure the bank account you set up for your company keeps track of these expenses for accounting software purposes.

Step 7: Track your business expenses and keep receipts

One thing I want to emphasize is the importance of expense tracking software when separating your business and personal finances. I think it is critical for your business to have an expense tracking software or system that helps you track expenses and invoices to get an accurate picture of the cash flow that is actually taking place in your business.

Benefits of expense tracking

Expense tracking allows your business to keep clear and simplified records for tax purposes. There’s nothing worse than scrambling to hunt down every expense and bill and being left dry come tax time. This can interfere with or even delay your tax preparation, ultimately costing you money. Don’t put yourself in this situation.

The best way to avoid this situation is to ensure that your employees use and are trained on business expense tracking software. Keeping detailed receipts also helps you maintain future compliance and audit readiness.

Step 8: Add yourself to the payroll

Paying yourself a salary from your business account is an important step in keeping a clear distinction between your personal and business income. This practice simplifies your accounting and ensures that your personal finances are kept separate.

Withdrawing your payroll from a business account can help you create a predictable income stream for yourself and avoid the pitfalls of combining business and personal funds. For more information on setting up a payroll account, continue reading.

Step 9: Track your business’s use of personal items

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

Documenting business uses

Making sure you keep accurate documentation of assets used helps at tax time. Keep detailed records of home office expenses and use mileage tracking apps for business vehicle use. These records can help lower your business tax bill during tax season and are a great way to make sure you have documentation to comply with any tax law changes or future business audits.

What is the importance of separating business and personal finances?

Keeping your business and personal finances separate is crucial for financial clarity, accurate tax reporting, and legal protection. This helps you maintain a clear picture of your business’s true financial health.

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

Recommended business bank accounts to separate business and personal finances

Choosing the right business bank account is essential to keeping your business finances separate. Here are some of my favorite options:

	Monthly Fee	Free Monthly Transactions	Annual Percentage Yield (APY)	Free Cash Deposit Limit
Bluevine Business Control Provider is a fintech platform that is backed and insured by the FDIC through a supporting bank partnership with Coastal Community Bank.	None	There is no limit	2.0% on qualifying balance of $250,000 or less	$4.95 per deposit (Green Dot)
Chase Business Complete Banking Member of the FDIC.	$15; waiverable	20	None	$5,000 per month

Frequently asked questions (FAQ)

Is it important to separate business and personal finances?

Yes, it’s important to separate your business and personal finances. If your business finances are legally kept in a separate account, your personal finances are afforded certain financial and tax protections. However, if you don’t properly separate your business and personal finances, these protections can be lost.

Can I use QuickBooks for my business and personal finances?

Yes, I actually recommend using QuickBooks for both your business and personal finances. Just make sure you don’t mix up the two accounts. QuickBooks can be useful for budgeting and billing, and it also makes it easier to keep separate files since QuickBooks does the document tracking for you.