7 steps to keep your personal and business finances separate
If you are a budding entrepreneur, use these tips to help maintain a strong division between your work and personal finances.
As a business owner you’ve probably heard that you should keep your business and personal finances separate — it can make filing your taxes smoother, and help position your business for success.
“Separating your finances is the first step to putting your business on the map as a real business entity. It gives your business legitimacy,” says Kaylyn M. Houston, Business Banking client manager at U.S. Bank.
But what does separating your finances look like, and how can you do it?
Step 1: Discuss your needs with a financial expert
The first step in separating your finances is identifying your business banking needs. Are you a sole proprietor of a small business? Will your employees need access to your business finances? Do you need access to a line of credit?
Tip: “Business owners will benefit from separating their finances and talking with an expert,” Houston says. “We are here to make your life easier.”
Step 2: Open a business bank account
Once you’ve identified what you need for your business finances, ask a banking professional about the products and services offered. After reviewing what your bank offers and how it can meet the needs of your business, you’ll be able to open a bank account that’s right for you.
Tip: If you’re a sole proprietor operating a business under an assumed name (for instance, Joe’s Cookies), you generally need to register the name with local officials to open a bank account in the name of your business. If your business is registered, the bank uses your Employer Identification Number (EIN) to open the account.
Step 3: Use your business credit card to build business credit
You opened your business bank account, and now you’re ready to pay your business expenses using a business credit card. Houston recommends using your business credit card to establish and build business credit. This will allow you to later apply, and pending approval, access lines of credit as your business grows. Just as importantly, building business credit allows you to keep your personal credit history separate.
Tip: You can usually apply for a business credit card using either your social security number or EIN. If you’re just starting out, whether you qualify will be based largely on the information you provide and your personal credit score.
Step 4: Track your expenses and receipts
This is where the benefits of separating your finances become clear. “If your personal and business finances aren’t separated, it can take hours to go through your checking account statements and see what was personal and what was business,” Houston says. “That can cause a lot of headaches.”
Tip: When it comes to tracking your expenses, let separate bank statements for separate accounts work for you. Use your monthly and end-of-year statements to verify your financial records and get a bird’s-eye view of your payments and receipts. “You can use your statements to track where your money was spent that year, how much you spent and which months you spent the most,” Houston says.
Step 5: Pay yourself a “salary”
Although your goal is to keep your personal and business finances separate, that doesn’t mean they’re completely disconnected. “I always advise my clients to take a salary for themselves and make it official,” Houston says. This can be particularly helpful during tax time.
Tip: Having a separate bank account to track revenue and expenses can make it easier to determine your business’s profit, and therefore your salary. Keeping your personal income separate from your company’s revenue maintains a key division between your business and personal finances, Houston says.
Step 6: File your taxes
When it comes time to file your taxes, you’ll be glad you separated your finances. Keeping your business finances separate can help you maximize tax deductions.
Tip: Your business account and credit card statements have a lot more detail than you would have for a personal account, which can save you time when filing taxes, Houston says.
Step 7: Talk with your banking professional as your business grows
The benefits of separating your finances don’t stop there. Your banking professional is there to provide you with financial guidance and support to grow your business. “When you're choosing a bank, I truly believe that you’re looking for a relationship that can help you really grow and mature as a business,” Houston says.
Learn more about how U.S. Bank can help your business succeed.