Separating personal and business finances
Why taking the time to separate your personal and business banking is worth it.
Separating your business accounts from your personal finances is integral to establishing your business as its own entity, both financially and professionally.
Here are some reasons to separate your finances:
1. It simplifies the process of filing your taxes.
When tax season rolls around, you'll need to know what to file for your business and what to file for your personal income information. Since you have to separate the two regardless, it makes sense to isolate your records and accounts year-round. You may consider consulting a tax advisor to see where you stand on business tax implications.
2. It streamlines IRS audits.
In the event of an audit, it's much easier to demonstrate that your filings are accurate if you have a separate business account. In that case, you can turn over your business's bank statements to serve as a clear record of your business's income and expenses.
3. It helps you manage cash flow.
By keeping personal and business financials separate, you'll have a better view of the money going in and out of your business and if you need to take any steps to improve your cash flow. A dedicated business account can help you keep better track of your payables and receivables, and help you prevent your business from experiencing an unexpected shortfall.
4. It helps establish a business relationship with your bank.
A designated business checking account makes your business financials and information more readily available to your bank. They will better understand your business's cash flow situation and credit need, and may be able to provide a range of potential credit options, as well as other insurance, payroll, and merchant services.
It is important for any small business owner to build a strong credit profile. Keep in mind that your business credit profile will be independent from your personal credit profile, so it's helpful to start building your credit profile as soon as it is appropriate for your business.
5. It shows professionalism.
A business-only account can depict your company as an established organization – not a personal side venture. Paying your customers and suppliers with a personal check or personal debit card, for instance, may not represent your business as well as paying with a designated business account.
How to separate the two
To build separation between your business and personal financials, focus on accounts, recordkeeping, and credit. Get started by:
Open a checking account just for your business. You may also consider a savings account.
Track business spending and receipts separately from personal financials.
Establish a separate business credit or debit card, as needed.
Many people believe separating their personal finances from their business finances will be complicated. However, in the long term, the ability to clearly separate business income and expenses from your personal finances will simplify things and save you time – and help your business prosper.
Learn more about steps you can take to build both your personal and business credit profiles.