Manage your business finances with Wave—it's free.

Send invoices, get paid, track expenses, pay your team, and balance your books with our free financial management software.

Get started

Importance of separating business and personal accounts

Jan 13, 2020 | 4 minutes read | Accounting & taxes

When I handed off my financial records to my accountant after my first year in business, she scoffed.

“This is a mess” was the gist I got from her reaction.

I was new in my business. I was excited about the money I was making, forging my own path along the way. But I didn’t have a clue when it came to managing my business finances. And I also didn’t realize that one of the first steps I should have taken was to separate my business finances from my personal finances.

Here’s why you should:

Why separate business and personal finances?

Separating your business and personal finances is so important, but just over a quarter of SMBs fail to do so. And nearly 23% find that commingling these accounts is their biggest bookkeeping challenge, costing them time and money.

While organization is a key benefit to separating finances, it’s minor compared to others:

Unlock tax benefits

One of the biggest reasons to separate business and personal accounts is due to the tax benefits, and there are plenty.

Not only is it easier to pull income and expense reports for taxes, keeping these finances separate can also reduce what you owe. Considering 30% of SMBs believe they overpay in taxes, this is a major upside.

When you separate business and personal finances, you can file your taxes separately as well. This puts most of the onus on your business, and less on you personally. In some cases, this can lower the amount you owe. Plus, depending on your business, you may actually be required to file separate tax returns.

Not to mention, come tax time, you can easily hand off all your business financial statements to your accountant for a clean, streamlined, organized process. Some might even charge extra if you don’t do this.

This reduces inaccuracies, which can also keep the IRS off your back, and save you from the hassle of an audit.

Protect your personal assets

More than three-quarters of entrepreneurs use personal funds to finance their business venture. Though calculated risks can pay off, you don’t want to risk your personal assets on behalf of your business.

Here’s one scenario: Let’s say you commingle personal and business accounts. You’re sued by a customer. You lose everything – your business, your home, all of your business and personal assets. However, if you were to keep those separate, the customer would sue your business, and your personal assets would thereby be protected.

The same is true for lenders and creditors, too. If your business can’t afford to make payments on its debts, your personal assets may be in danger. By keeping them separate, you limit your personal liability for business matters.

Increase your likelihood of securing funding

Small business loans and credit cards are great ways to fund your business if you don’t have the necessary capital. 40% of U.S.-based businesses applied for a loan in 2017, yet an average of only 28% of loan applications are approved. A clear delineation between business and personal finances can help you build the case during your small business loan application, hopefully improving your chances of approval.

Even if you don’t need funding now, you might in the future. Lenders and creditors will look at your business’s financial records. If you keep them separate, this legitimizes your business and offers a stronger argument for why you’re a responsible and qualified borrower.

Learn more about securing funding through a small business loan:

Manage your money more easily

The second biggest reason businesses fail? Lack of cash flow.

While there are many potential culprits for lack of cash flow, there’s one resounding solution for early detection: organized books.

When you have separate business and personal finances, it’s easier to see if you’re making a profit and, more importantly, why you are or aren’t generating cash flow. Plus, handoff to your tax accountant is seamless, and in the unfortunate case of an audit, it’ll be easier to provide the documentation you need to acquiesce the IRS.

Improve your mindset

One of the challenges entrepreneurs face that isn’t always talked about is the mindset switch that goes along with transitioning from employee to business owner. Your passion is no longer just a passion—-it’s a full-on business-and there’s a psychological shift that goes with that.

You might doubt yourself or feel imposter syndrome sneaking in. But simple steps like formalizing your business with its own financial accounts can add legitimacy to your endeavor, and give you the confidence boost you need to launch a successful business.

How to separate business and personal finances

To be able to delineate business and personal transactions, there are a few steps you need to take before you head to the bank:

1. Register and incorporate your business (if you haven’t already). This includes applying for an Employer Identification Number which you’ll use on tax returns, applications, and other financial documents and accounts. 

      2. Determine how to pay yourself. It’s not as simple as just depositing the funds you receive from customers into your personal bank accounts; you need to set up a calculated system.

      3. Open your business financial accounts. This includes a checking account and credit card. You might also want to consider a business savings account.

      4. Apply for a business credit card. Even if you don’t use it, this will give you credit history that you can lean on in later stages of your business.

      5. Sign up for an accounting software and link your financial accounts. Track income and expenses for your business here.

      What about shared expenses?

      There are times when the lines blur between personal and business finances. Home-based businesses, for example, might be able to write off part of their rent or mortgage, home internet, and home utility costs as business expenses. Others might use their personal car to travel to and from meetings.

      In these cases, you can pay with your personal accounts and claim some of the expenses on your business records. Save the receipts, digitize them with Wave, and take notes for everything. Remember to always ask your trusted tax professional, as every business and local jurisdiction is different.

      Take control of your finances

      As an entrepreneur, you’ve taken control of your destiny: using passion to fuel your business endeavors. Though it’s not the most attractive part of being an entrepreneur, when you take control of your finances, you also take control of your business and your life.

      Award-winning financial software designed for entrepreneurs

      Read next