8 Tips to Help You Separate Business and Personal Finance

How to Separate Business and Personal Finance; Keeping your business and personal finances separate is vital for operating your business. Learn eight ways to do that and otherwise optimally manage finances.

Kelly Boyer SagertUpdated April 14, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

When you start a small business, you may not realize right away the full extent of what you’re undertaking. It might feel more like a side gig at first. But, as your sales accumulate, it might become something more.So early on, you might have deposited your side gig funds into your personal checking or savings account. But as your business grows, is that a good idea? Is it even permitted? Below we’ll highlight how to manage your personal and business finances, including what’s legal and what’s typically recommended, along with eight suggestions that may be helpful when you’re working to separate business and personal finances.

Are Separate Accounts Required for Business and Personal Finances?

Whether separate accounts are required for business and personal finances depends on the structure of your business. There are many different business structures, and the rules can vary depending on which applies to your business.Three common business structures are sole proprietorships, limited liability companies (LLCs), and corporations. Here are brief definitions of each one and what the requirements are:

Sole proprietorship. This kind of business is owned by an individual and, legally speaking, it does not have an existence separate from the owner. Any business income or loss is reported on the owner’s personal income tax return. Therefore, sole proprietors aren’t legally required to separate personal and business funds. That said, a sole proprietor might still consider creating separate accounts because, in an IRS audit, the burden of proof lies with the business owner to clearly show business income and expenses.
Limited liability company (LLC). An LLC is a business structure in the United States that blends elements of sole proprietorships and corporations. One benefit of an LLC is that the business owner is not personally liable for any of the company’s debts. Unlike a sole proprietorship, an LLC is required to have a separate business account.
Corporation. Corporations are legal entities that are separate from their owners. Because this type of business has many of the same rights and responsibilities that a person has, it has been referred to as a “legal person.” Like an LLC, corporations are required to have their own business accounts, separate from any personal ones their owners may have.

What kind of liability you’re willing to take on, how you want to handle taxes, and how much paperwork you want to do are important considerations as you’re choosing a business structure.(If you’re still in the process of creating your company, you might want some helpful steps for starting a small business so that you can start off on the right foot.)

Benefits of Separating Business and Personal Finances

Psychologically speaking, having separate accounts can be a key step in establishing yourself as a business owner. What’s more, when bills are paid through a business checking account or through a business credit card, this may signal to clients and vendors that you take the business seriously.Plus, businesses can write off certain expenses as self-employment tax deductions, and having separate accounts can make it much easier to keep tabs on which expenses are business-related.Options for managing your tax-related business matters include hiring a professional or learning more about small business accounting yourself.After you open up business accounts, it should also be easier to create the type of financial documents that banks and other lenders would typically want to see when you’re seeking funding. When your company and personal finances are blended, it can be more difficult to manage that, as well as more challenging to build your small business credit scores.

8 Tips on Keeping Separate Business and Personal Accounts

Starting and maintaining separate accounts for your business doesn’t have to be challenging. Here are some simple ways to get started:

1. Get an Employer Identification Number (EIN)

An EIN is basically the business version of a Social Security number. When you open a business bank account or file taxes, for example, this would be the identification number you would use. To keep your corporate finances and personal finances distinct, use the EIN on all business documents and your personal Social Security number on personal ones.

2. Open a Business Bank Account

Using your EIN, open a business savings or checking account. A checking account or an account that combines features of savings and checking accounts, may be the more practical choice. That’s because it allows you to pay bills and make purchases. There are plenty of options available, so it can make sense to shop around and see what would work best for your company.

3. Get a Business Credit Card

As a related step, open a business credit card and be sure to put company-related purchases on that card. This is another way of separating business and personal finances, while also building credit for your business. Numerous business credit cards are available, so explore and pick one with the benefits that are most advantageous for your company. If your business requires extensive travel, for example, you may benefit from a card with flight and hotel rewards programs.

4. Create a Small Business Budget

Creating a small business budget will likely be one of the most important things you do as a new business owner. A realistic budget can serve as a financial operations guide. If it’s detailed, it can also help you spend within your means which may, in time, help your business turn a profit. Once you’ve created a budget, compare financial reports against it regularly to see where you might be overspending. You’ll also likely want to review your budget from time to time and tweak it as needed.

5. Pay Yourself a Salary

Include your salary in your budget and then follow through by paying yourself regularly. This is a more structured approach than randomly withdrawing money when you need personal funds. Being methodical like this can help contribute to business success. This strategy also strengthens the line between business and personal finances.

6. Manage Business Cash Flow

Cash flow has been called the life’s blood of a business. At its simplest, it involves tracking how much money is coming into your business and how much is going out. Problems can arise if, for example, customers owe your business enough money to cover payroll, but don’t pay on time. If you don’t have an emergency savings account and your payroll expenses can’t be met, then that’s a serious cash flow problem. To help you handle cash flow issues, you might want to brush up on business cash management.

7. Create Consistent Company Policies

It’s important for a business owner to separate business and personal finances. But it’s also important for other people in the company to do the same thing. If one person carefully keeps these two apart, but someone else — whether a business partner or an employee — doesn’t, then problems can still arise. Everyone needs to be on the same page, so communicate company policies and make sure that everyone understands and follows them.

8. Borrow Strategically, When Needed

Perhaps there’s money needed to start a business or a cash infusion is necessary for business growth. If so, there are plenty of options. You may want to start by considering the benefits of business loans vs. personal loans.Wondering how to apply for a small business loan? Here are six steps:

Determine the purpose of the loan. It could be for startup costs, for example, or to purchase equipment or inventory.
Calculate how much money is needed. Don’t underestimate what’s required. A realistic estimate can help to reduce stress and prevent the need for additional loans.
Consider what you might be eligible to receive. Lenders assess risk before approving loans, often by reviewing business credit scores, cash flow, and other factors.
Choose the type of loan that’s right for you. Each type has pros and cons, including getting a $40,000 personal loan that may help you cover startup expenses.
During that process, also compare types of lenders. For example, it can be easier to qualify with online private lenders — but be sure to explore your options before deciding.
Gather the documents needed to apply. This will likely include business and personal financial statements and tax returns, business legal documents, and personal ID, among others.

The Takeaway

There can be many advantages to separating your business and personal finances, and once you get things set up, it doesn’t have to be hard. As your company grows, you may find you want funding to take advantage of business opportunities, and having established business credit may be helpful if you’re looking for loans. It can also help to be able to compare your funding options all in one place.Lantern by SoFi can help you find personal loan offers. Fill out one simple form and you’ll receive information from multiple lenders in our network so that you can choose the one that you think will work best for you.

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About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.

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