Keeping Business and Personal Funds Separate
This post may contain affiliate links, which means I’ll receive a commission if you purchase through my link, at no extra cost to you. Please read the full disclosure here.
One of my top recommendations for business owners is to keep business and personal funds separate. This is one of the easiest things you can do for peace of mind in your business - plus it’s free!
Keep reading to learn why not commingling business and personal funds is so important, and how easy it can be.
There are two main reasons why keeping business and personal funds separate is so important:
- To avoid piercing the corporate veil
- To streamline and simplify the bookkeeping process
Let’s break these down, shall we?
Piercing the Corporate Veil
So, what does “piercing the corporate veil” mean?
Piercing the corporate veil is when the courts completely disregard the separate entity aspect of a corporation.
When you registered your business with your state, you did so to create a legal barrier between yourself and your business. Specifically, a legal barrier between your personal assets and your business assets.
If your business were to be sued, you would point to that separate entity and say “my personal assets are protected from this lawsuit because my business is a separate legal entity from myself”.
However, if you are using your business bank account as your own personal piggy bank and constantly making personal purchases with your business accounts (or vice versa), an argument could be made that you and your business are, in fact, not separate. And whoever is suing you, could attempt to come after your personal assets.
It’s important to keep these two entities completely separate so that such a claim could not be made.
Simplify the Bookkeeping Process
Keeping personal and business funds separate helps to streamline and simplify the bookkeeping process. Whether you are doing your own bookkeeping or looking to hire a bookkeeper, this will make your life a whole lot easier.
If are only using business accounts for business purchases, you won’t have to go digging through personal credit card statements to find hidden business transactions.
If you have personal transactions on business cards, you have to ensure that you remove them from the books or ensure that you let your bookkeeper know that those are personal transactions.
If you have business transactions on a personal card, you will have to go looking through personal accounts and enter them into your bookkeeping system, or provide the information to your bookkeeper.
Either way, it’s a lot of extra work for everyone involved.
When you have to complete this additional manual task of searching through your personal accounts, you risk not catching all business transactions. And if you don’t catch all business transactions and add them to the books, you may be missing out on business deductions on your tax return that could help save you money on taxes.
Keeping business and personal transactions separate allows you to have a more streamlined bookkeeping process, and have peace of mind that all business transactions will be reported in your books.
How to Keep Business & Personal Funds Separate
The easiest way to keep business & personal funds separate is to open a business checking account, business savings account, and a business credit card.
The business credit card is totally optional, and I only recommend using a credit card if you are confident that you will pay it off each month and not rack up credit card debt. Credit card debt is a slippery slope, so be very careful using a credit card.
You can find a list of my favorite business banks and credit cards here. There are tons of free business checking accounts, so be sure to choose one that doesn’t have a monthly fee.
Ensure that all business transactions are flowing through the business accounts, and that there are no personal transactions flowing through the business accounts.
Once you open your business checking account, deposit all business funds into that account. Log in to your payment processors (Stripe, Shopify, HoneyBook, etc.), and change the deposit account to your new business bank account.
You’ll also want to move all of your business expense subscriptions to the business checking or business credit card. Log in to your monthly subscription accounts (Canva, HoneyBook, Calendly, Zoom, etc.), and change the auto payment account to your business checking or credit card.
When you’re making purchases in-person (maybe meeting with a client at a coffee shop), be sure to swipe your business card rather than your personal card. Be sure to only use the business card for business purchases, and not for personal purchases.
How to Pay Yourself When Keeping Funds Separate
Sometimes when a new client comes to me, they’ll say they’ve been “paying themselves” from the business by making occasional personal purchases on the business card.
This is not the appropriate way to pay yourself as a business owner, as this can pierce the corporate veil and make for very messy books.
If your business is not an S-Corp, to pay yourself from the business, you’ll transfer funds from your business checking to your personal checking. This is called an “Owners Draw” or “Owners Distribution”.
If your business is an S-Corp, or is being taxed as an S-Corp, you will pay yourself through payroll as a W-2 employee of the business.
Either way you slice it, "paying yourself" from the business by making the occasional personal purchase as a "bonus" is not the appropriate way to pay yourself as a business owner.
Conclusion
In conclusion, it's time to open a business bank account, move your business transactions over to the business account, and stop making personal purchases on a business card. This is important for the protection of your personal assets + for the organization of your business financials. Take a few minutes today to find a business bank you love and open that checking account.
If you're doing your own bookkeeping and want more education & guidance like this, check out my program, Clear Profits. Clear Profits is a DIY bookkeeping course + digital product bundle that will teach you everything you need to know as a business owner doing your own bookkeeping.
If you're ready to take bookkeeping off your to-do list for good and hire a professional to handle it for you, fill out my inquiry form today!
