6 Ways To Separate Personal and Business Finances Effectively
Written by
Chris Ozarowski
Edited by
Molly Sullivan
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Do you have a small business or side hustle that’s starting to make some money? Do you use the same accounts for your business and your personal expenses?
When you start a small business, keeping your personal money and business money separate is a way to protect yourself. Here are a few ways you can do so.
Why You Should Separate Your Business and Personal Finances
Mixing your personal and business money can cause a lot of problems. First, it can make it hard to understand how well your business is really doing. If your personal expenses are mixed with your business expenses, you might think you are spending more or less than you actually are, which can lead to bad business decisions or debt.
Also, if your finances are mixed, it can cause legal problems. If your business gets into debt, your personal assets like your home or car could be at risk if they’re not separated from your business.
Keeping your money separate can make your business look more professional to banks and investors. It also makes tax time much easier — you can clearly see what money belongs to the business and what is yours, which helps you avoid mistakes on tax returns. Separating your personal and business money can also help you plan better for the future.
How You Can Separate Your Personal and Business Finances
Here are a few steps you can take to separate your business from your personal finances.
Create an LLC
When you start a business, one of the first things you should do is choose a legal structure. While many businesses operate as a sole proprietorship, the simplest type of business to form, business owners of a sole proprietorship have unlimited personal liability. This means that when their business incurs debt, everything they own may be on the line to pay it off.
Business owners can protect themselves from this by forming a single-member LLC. In an LLC, which stands for limited liability company, owners are typically not personally liable for business debts and liabilities. Creating an LLC may be slightly more complicated than a sole proprietorship. You will need to file Articles of Organization with your state and pay a filing fee. LLCs may also have annual reporting requirements and fees depending on state laws. Make sure to check the requirements for an LLC in your state.
Once you have an LLC, you can no longer use your business accounts for personal expenses since that may lead to you losing your limited liability through something called “piercing the corporate veil.”
Open a Business Bank Account
Next, you need to open a bank account just for your business. Look for a bank that offers services that match your business needs, like low fees, online banking and good customer support. You will probably want to start with a regular business checking account, but once your business grows, you may want to open separate accounts for different parts of your business, such as business savings, taxes, incoming customer payments and payroll.
Having a business bank account helps you manage your business’ money. You can see what you are spending on your business and keep it separate from your personal spending. It also makes it easier to manage cash flow, the money coming in and going out of your business.
Get a Business Credit Card
Getting a credit card for your business helps keep your finances in order — anytime you need to buy something for your business, you should use your business credit card.
A business credit card can help your business build its own credit history. This can be useful for getting loans and other credit later. It also helps keep track of expenses. This is handy during tax time or when you need to look back at your spending.
A credit card or line of credit can also be helpful when there is a time gap between your expenses and when clients pay your invoices. If you need to pay for something for your business but won’t get paid for a few days, a business credit card or line of credit can help you maintain good relationships with your vendors by paying on time.
Make sure to always pay your credit card bill on time to avoid interest and fees, and keep your spending under control to avoid debt.
Set Up a Bookkeeping System
Bookkeeping means keeping track of all your business transactions. At the end of the day, good bookkeeping lets you see if your business is making money or losing it and makes sure you are ready come tax time.
If your business doesn’t have a lot of transactions, it may be better to do your own bookkeeping. You can use simple software or just spreadsheets in Excel or Google Sheets to keep track of your finances.
If your business is bigger or you’re too busy, you might want to hire a bookkeeper. They can take care of your finances for you, which helps avoid mistakes and frees up your time to focus on your business.
Pay Yourself a Salary
If your business and personal finances are separate then you need some way to transfer money to yourself so you can pay your personal expenses. This is where paying yourself a salary comes in.
Think about how much you need to live on, what your personal savings goals are and how much your business can afford to pay you. You can set up a regular schedule to transfer money from your business account to your personal account. This makes your income steady and predictable, just like a regular job.
Keep Receipts and Document Expenses
Keep all of your business receipts and make sure you separate them from your personal ones. If you go to the store and buy things for yourself and your business at the same time, pay for them separately and keep receipts separate.
This enables you to track your business expenses clearly so you can put them into your bookkeeping software later. It’s also a good idea to back up your receipts in some way in case you lose them. There are apps and tools that can help you keep track of your receipts and expenses, but in the beginning, you can also just take photos of all of your business receipts.
Planning Your Personal Finances
Good personal finance starts with two key practices — saving and budgeting. You should aim to save a portion of your salary each month. Financial experts often recommend saving at least 20% of your income. This builds a safety net for emergencies and future needs.
You can create a budget that covers all your monthly expenses, including food, housing and entertainment. This lets you control your spending and ensures you can save. Budgeting apps can help you track your spending and keep your budget on track. You can also set financial goals, like saving for a vacation or paying off debt, to motivate you to manage your money better.
Planning Your Business Finances
When it comes to business finances, it’s a good idea to create a detailed budget that includes your regular expenses and potential unexpected costs. This way, you can cover your costs without dipping into emergency funds. Try to account for both future income and expenses so that you aren’t caught unawares.
One of the most important things you can do is to set aside money regularly for taxes based on your expected income. If you are self-employed and your tax bill is more than $1,000 yearly, you must prepay your taxes every quarter. Tax professionals recommend that you put aside 30%-35% of your income for taxes. You can put this money in a separate business account so you don’t spend it by accident.
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