Separating personal and business finances

When starting a new business, there are a number of reasons why you should separate your personal and business banking.

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Published: July 26, 2010
Updated: October 08, 2014

When starting a new business, there are a number of reasons why you should separate your personal and business banking. These include:

Part-time/hobby businesses

The IRS has strict rules that stipulate that only businesses can deduct business expenses. If your business “looks like a hobby” and you use a personal bank account for your business expenses it can make it harder to convince the IRS that you are operating a legitimate business.

"The costs of a business checking account are far less than the benefits to your business."

Filing your taxes

When it comes time to file your income tax return you will need to schedule your income and expenses for your business separately from your personal transactions. It will be more time consuming to distinguish your business from personal income and expenses if they are co-mingled on a single bank/credit card statement.

Audit trails

The IRS does not require that you have a separate bank account for your small business, but it does require that all records be accurate, complete, permanent, and show a clear record of all business related income and expenses. Establishing a separate business account will provide you with a dedicated statement that is a clear record in the event of an audit.


Receiving checks from clients in your personal name can convey that your company is a part-time venture and that you do not take it as seriously as your clients do. The costs of a business checking account are far less than the benefits to your business. Fees are usually tax deductible as an expense. Opening a business account with a bank earlier can help you later if you need financing.

Establishing credit

Many entrepreneurs finance their business startups using their personal credit cards, savings, or home equity. But the longer you self-finance, the longer you delay establishing business credit and taking advantage of business loans. Small business owners seeking credit need to carefully weigh and consider their options. Applying for credit should be a well-calculated and thought-out process.

How to separate your finances

The key areas to build separation between business and personal finances are accounts and recordkeeping, and in credit. In terms of your accounts, establishing completely separate checking and savings accounts for your business is critical.

Those accounts help create a separating wall. Good recordkeeping, which tracks business spending and receipts, helps with projections and keeps you organized on the tax front. Key areas worth covering include, but aren’t limited to:

  • Check register. It’s a good idea to reconcile your bank statement monthly to get a realistic picture of cash on hand.

  • Summary of receipts of gross income. Whether you do it daily, weekly or monthly, keep track of where the money is coming from with notes explaining the origin of all money received.

  • Monthly summary of expenses. Do the same with your outgoing expenditures and document what you spend money on each month.

  • Disbursements record. This can be part of your check register, but in addition to noting expenses paid by check, you should document all expense payments, whether by check, cash, or credit card, and maintain all receipts.

  • Asset purchase listing. Record purchases of all equipment acquired in connection with the business.

You should also establish separate credit cards. This delineation can be very important, especially when you decide to seek financing. It will be helpful because every lending institution will do a credit check, and having those accounts separated and up-to-date will help make that decision easier.

If you have any questions about separating your business and personal finances, consult your accountant, tax attorney, or financial advisor.