February 2021

Why and how to keep your personal and business finances separate

Many new entrepreneurs tend to use their personal bank accounts to deposit payments and pay bills for their business. Once your venture is up and running, however, it’s important to take steps to separate your business and personal finances.

Why keep business and personal finances separate?

Liability protection

Your business structure affects your personal liability. A sole proprietorship is not a separate business entity and therefore, under this structure, you are still personally responsible for the liabilities and debts of the business. Partnerships, limited liability companies (LLCs) and corporations, on the other hand, all offer varying degrees of personal protection from liability and debt. With an LLC, for instance, “no one can come after your personal assets,” says Diana Shaffer, Small Business Strategy and Product executive with Bank of America. To compare them, see the Small Business Administration’s guide to choosing a business structure.

Building business credit history (and qualifying for financing)

It’s essential to build your business’s credit history separately from your personal credit history. While lenders may look at your individual creditworthiness, they’ll also want to see that your business is in good standing with its creditors. Establishing separate accounts in your business’s name will help to establish the business as a separate entity with its own credit history separate from yours as an individual.

Streamlined accounting

Separating your business and personal finances will help you maintain a clearer picture of your company’s cash flow and financial health apart from your personal assets and liabilities. “A separate business account provides you the ability to manage your business in one central location,” Shaffer says.

Better recordkeeping

Corporations and LLCs must, by law, keep their business’s finances separate from the owners’ personal accounts. However, even if you have opted for another structure, separating your business and personal finances will make it easier to maintain good records. This will be helpful at tax time and if you are ever audited.

More relevant account features

Business account — whether checking, savings, or debit and credit card accounts — differ greatly from those for personal use. Features may include account management, business-centric cash back and QuickBooks integration, among others.

Here’s how to separate your finances

Select the right business structure

Choosing a business structure — whether it be a sole proprietorship, LLC, partnership or corporation — demonstrates that the business is a separate financial entity from the owner and influences how you are taxed, the paperwork you need to file, funding options and personal liability. For more information, see the IRS’s overview of the most common business structures.

Many small business owners find it best to seek advice from their accountant and attorney about which legal entity is best for their situation. The entity you choose may affect how much liability protection you have, how much you pay in taxes and other matters, and the procedures for forming a business entity vary based on the type of entity and your state. Generally you must register your entity through your secretary of state.

Keep reading — Access the entire article at our Small Business Resources site.

To discuss your business goals, set aside some time for a telephone call with a Small Business Specialist.

MAP3388939 | 1/2021