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For many entrepreneurs, it can be difficult to separate business and personal finances. Whether it’s a small-business owner who is just starting or a veteran business owner with a successful enterprise, it can be difficult to find the right balance.
Studies show that one of the most common reasons that nearly 20% of new businesses fail to make it through their first year is due to various financing hurdles, such as cash flow problems and the inability to obtain critical capital. Separating business and personal finances is key to overcoming these hurdles.
By setting up a system to keep personal and business finances separate, entrepreneurs can be confident that they have the cash they need to keep their company running smoothly.
7 Tips for separating business and personal finances
When it comes to your finances, you need to establish clear boundaries. This is important because finances are a vulnerable subject that’s easily exploited. The more you know about your finances, the better you can manage them.
Arguably the most crucial boundary you need to set right away is separating your business and personal finances. Here are five tips to help you get started:
1. Form a legal business entity
One of the most effective ways to separate your personal and business finances is to legally establish your business as its own entity. This means choosing a business structure like a Limited Liability Company (LLC), corporation (C-corp or S-corp), or partnership, depending on your needs.
Having a business entity is important for a few reasons. Forming a legal entity helps protect your personal assets—such as your home, savings, and car—in case your business faces lawsuits or debt. Without a separate entity, your personal finances could be at risk. A legal business entity allows the IRS and state agencies to treat your business as a separate taxpayer. This simplifies filing and reduces the risk of audits or penalties due to mixed records. Operating under a registered business name can make your company appear more legitimate to customers, lenders, vendors, and investors. It also simplifies business banking. Banks typically require proof of legal business formation to open a business bank account or get a business loan or line of credit.
2. Apply for an employer identification number (United States) or Business Number (Canada)
An employer identification number, or EIN, is a nine-digit identification number assigned to businesses by the IRS. In Canada, it's a nine-digit business number, or BN, assigned by the CRA, if you want to operate federally; check with your province to learn about provincial incorporation. Also, Canadians should check with CRA to find out if you require GST number.
The EIN or BN is used to track business profits and tax liability, and it’s critical for setting up a system to keep personal and business finances separate. In some cases, an EIN or BN is not only used for tax purposes, but it can also be used to open a business bank account, apply for a business credit line, and more.
It should be noted that EIN and Business Numbers are free to receive, and if you are being asked to pay for one, it is a scam. Learn more about avoiding this scam.
3. Open a savings and checking account for your business
Next, you need to open a savings and a checking account for your business. Having a separate business account will help you track your business expenses, which will also help you ensure that you have the cash you need to keep your company running.
You can also use this account to pay your business taxes and other expenses, such as office supplies and other day-to-day business expenses. You’ll also want to keep a certain amount of cash on hand in this account in case of an emergency.
4. Apply for a DUNS number
After you've applied for your EIN or BN and you've established your business entity type, you'll also want to consider applying for a Dun & Bradstreet (DUNS) number.
A DUNS number is a number that uniquely identifies your business and is used to track your company’s financial information. The most important thing about a DUNS number is that it can help you get approved for financing if you need to apply for a business loan or lines of credit.
A DUNS number is also used to track your company’s creditworthiness. This means that you can build your credit history separately from your personal credit history, which will allow you to get approved for financing in case you need to apply for a business loan or lines of credit.
5. Open a line of credit in your business’s name
To keep your business finances separate from your personal finances, you'll also want to open a line of credit in your business’s name. Leverage business credit cards for company expenses to establish and strengthen your business's credit profile. This will help you avoid the temptation to dip into your business line of credit to pay for personal expenses and vice versa.
Establishing a line of credit in your business's name (whether a business loan or a business credit card) is a great way to keep your business and personal finances separate. This will become highly beneficial when it comes time to pay your taxes since you'll be able to quickly identify all of your business expenses on a separate business credit card.
6. Maintain separate records for your business
Finally, you want to create a system for tracking your business finances and keeping them separate from your personal finances. Safeguard business receipts systematically, categorizing and organizing them for efficient retrieval and documentation. Proper receipt management streamlines tax filing processes and substantiates business deductions, safeguarding against potential audits.
Separating your business and personal finance records is crucial because it will allow you to manage your money better, ultimately enabling you to become more financially empowered. If you've already established separate banking accounts and credit lines, then maintaining separate records for your business and personal finances will be much easier than you think.
Other things you'll want to consider may include:
- Separating/saving receipts
- Monitoring business use of personal items, such as your vehicle
- Educating your staff on how to process and report business expenses properly
- Opening utility accounts in your business’s name – not your name
7. Work with a professional
As an entrepreneur, trying to manage every aspect of your business alone—including the finances—can quickly become overwhelming. Hiring a qualified financial professional like a bookkeeper, accountant, or tax advisor can help you stay organized, compliant, and focused on growth.
There are many reasons why you should work with a professional to ensure your business finances are maintained properly. A professional can ensure your income and expenses are properly categorized and documented, reducing the risk of errors or missed deductions. It's also important to remain compliant with tax laws. Business taxes are more complex than personal taxes. An accountant can help you navigate things like quarterly estimated tax payments, self-employment taxes, and state filings.
You also protect yourself against audits. Should you ever face an audit, a professional can guide you through the process and provide supporting documentation to back up your records. Beyond day-to-day tasks, professionals can help you with budgeting, forecasting, pricing strategies, and preparing for growth or investment opportunities. Delegating your bookkeeping and accounting frees you to focus on running and growing your business instead of getting bogged down in spreadsheets or tax forms.
8. Use separate apps and tools
Using dedicated apps and tools specifically for your business—not your personal finances—helps reinforce the boundary between your business and personal life. It also improves accuracy, organization, and efficiency when managing your business finances.
You can learn more about choosing accounting software for your small business with BBB's tips.
Set your business up for success with more tips from the BBB
If you're just starting to set up your business, then you'll want to take the necessary steps to separate your business and personal finances to avoid any potential conflicts of interest. This will help you build a solid financial foundation for your business, which will, in turn, allow you to take more calculated risks and generate even more income.
Looking for more tips on managing your business? Then check out the BBB business news feed and the BizHQ for more excellent resources.