10 Techniques To Keep Personal and Business Finances Separate-And Why It's Important

Keeping a business operating smoothly and efficiently is a feat not accomplished easily. Business owners have many demands that require attention – almost simultaneously. It can be easy for a small business owner to mix personal and business life, especially since your business is your livelihood.

When it comes to finances, it is critically important to keep business and personal finances separate – especially if you have an LLC or corporation. Here are the 10 ways you can keep business and personal expenses separate and why you need to do so.

1. Obtain an EIN

An Employer Identification Number (EIN) is like a social security number for your business. You will need your EIN when you file your business tax return or payroll tax return. You will also need an EIN to complete many of the following techniques in this article – such as opening a business bank account or applying for credit. Applying for an EIN is simple and can be done on the IRS website.

In a sole proprietorship, your SSN typically acts as the EIN. Pursuing a different business entity will require an EIN that is separate and different from your SSN.

2. Form an LLC or Corporation

Forming an LLC or corporation creates a separate entity in the eyes of the law and IRS. This not only creates a distinction between you and the business, it provides you with a layer of protection. Should some misfortune come upon the business, your personal assets are protected from lawsuits — as long as the corporate veil is not pierced, which we'll discuss in a moment.

This separation can also make it easier to keep business and personal finances tidy because you can open up accounts and get other financings in the name of the business – which can be difficult as a sole proprietor.

3. Get a DUNS Number

After obtaining your EIN, you should consider a Dun & Bradstreet data universal numbering system (DUNS) number. A DUNS number is assigned to a business like an EIN and designates it as a different entity. A DUNS number creates an online business identity, which provides up-to-date data and analysis of a business. It's like having an in-depth public profile of your business.

DUNS numbers are often referenced by potential business partners, investors, and lenders to forecast the financial stability of a company. It's another way to create a public profile for your business and ensure that you and your business are not being conflated.

4. Open a Business Bank Account

Opening a business bank account may be the most important step you can take as a business owner. It is the easiest and most effective way to ensure that your personal and business finances are kept separate. It is the hub of your business financial world.

Without a separate bank account for your business, it will be very difficult – if not impossible – to make a distinction between its assets and your assets. BlueVine is one of our partners that offers free online business checking accounts if you're in need of one.

5. Apply For a Business Debit/Credit Card

Once you have a business bank account, the next step is to procure a debit card. It will make it much easier to purchase business necessities with the business's money – and keep a clear line between personal purchases and business purchases. It also keeps a clear transaction history.

You can also apply for a business credit card. Many banking institutions offer their own business credit cards – which may be easier to apply for than other credit card companies. Making smaller and regular purchases with your business credit card – and paying off the balance – will grow your business credit score. It will also reflect well on your DUNS profile and potentially open up your business to larger investment or loan opportunities.

6. Pay Yourself a Salary

Since you are your own boss, you need to pay yourself. It demonstrates that there is a formal boundary between yourself and your business. It can be tempting to use the business debit/credit card for personal use, but this can open a can of worms. Take an owner's draw or pay yourself a salary. Pretend that you work for someone else and only use personal money for personal expenditures.

7. Keep Your Receipts Separate

Today, with electronic payments dominating the world, you may not deal with physical receipts very often. Even so, if you use your debit/credit card at a physical location to purchase something, it's not a bad idea to hold on to those receipts.

Receipts illustrate exactly what you purchased, where you bought it, when you bought it, and from whom. They provide extra information that can come in handy should the IRS decide to pry into your business tax filings. By using your business credit/debit card and filing the receipts away somewhere, you will save yourself time, stress, and money in the long run.

8. Track Your Personal Use When It's Business Related

Since you own your business, sometimes a little blending of your personal life and business life is unavoidable. Perhaps you work from a home office and some of the items (computer, printer, software, etc.) are your personal belongings. Maybe you use your car to drive to business meetings.

It is best practice to purchase all items for business through your business account. If you use personal items for business purposes from time to time, keep track of those instances. You might be able to write some of those expenses off come tax season.

9. Hold Everyone Accountable

If you are the only owner of your business, this may not apply to you. If your business has multiple owners – or employees with pay cards – it is important to have a conversation with them. Keeping business and personal finances separate is a group effort.

While you may be operating by these guidelines, your fellow owners may not be. Make sure everyone involved is abiding by these principles so your business keeps running smoothly and safely.

10. File Your Business Taxes

This may sound obvious, but once your business begins making a profit, you will need to file your taxes. If you are blending business and personal expenses, April could be the worst month of the year for you.

If you have a business account, use your business cards for business purchases. Keep clear lines of separation between you and your business. Do that and filing your business taxes will be a lot easier for you or your accountant.

Why You Should Separate Your Business and Personal Finances

Now that we've covered how to keep your business and personal finances apart from one another, let us discuss why you should do it. There are several reasons why it is critical that you do so, but we will discuss two.

It Can Cause Legal Issues

Earlier we mentioned piercing the corporate veil. If your LLC or corporation succumbs to financial trouble and cannot pay back the debt, you as the business owner are generally not held liable. Sometimes courts will hold business owners personally responsible for the debts of their business. When this happens, it is called piercing the corporate veil. Courts can do this for a few reasons.

One of the most common instances occurs when there is no clear distinction between the business owner and the private citizen. In other words, if your business and personal finances are in one account, a court can pierce the veil. If you pay your personal obligations with your business card (or visa versa), a court can pierce the veil.

A court will only do this if it finds that there is some serious act of misconduct.

It Places Personal Assets At Risk

This is the worst-case scenario. Your business can't pay back a debt, your debt collectors sue you for their loss, and the court decides to pierce the veil making you liable. What happens next? It depends on the amount that you owe. If you owe a couple of thousand dollars, you may be able to gather that amount and pay it off. If it's a large sum and you can't pay it back, your assets will be in jeopardy.

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