The Naked Truth Behind Why You Must Separate Your Personal and Business Finances (And How to Make It Painless)

A couple struggles to understand their finances

When it comes to personal and business finances, it’s never a good idea to mix business with pleasure.

Yes, it’s time for us to have that talk. No, I don’t mean about the birds and the bees, although that might be more comfortable to some. I’m referring to, the money talk.

There is no black and white with money management – it all depends on where you are now and where you plan on going. Maybe separating your finances wasn’t a big deal when you first started your business. Yet, as time has gone on, you’ve now discovered a true money mess on your hands. That’s why you’ve got to start now.

What we tend to forget is that our business is a free-standing, independent entity. Whether you’re running a boutique online Etsy store or a mid-sized creative agency, separating professional and personal finances is a smart money move for every business owner.

For many of us, life has been changing pretty quickly during this pandemic. It’s difficult to ignore the week’s big headlines about rising unemployment and struggling industry sectors. With most of the world on the flipside of things, we need to reassess our money strategy. However, protecting your personal and business finances is an essential step no matter where we are in the world. As a business owner, I don’t need to tell you how hard it may feel right now. If I could give you our two cents on it, separating your finances can help make getting through these difficult times a little easier. Make the shift before you’re a day late and a dollar short.

Why Separate Personal And Business Finances?

Managing your finances effectively is essential to your health, both literally and financially. A lot of us are staying in more lately – cancelled travel, working from home, date nights in the living room, and pretend vacations on the balcony. As our spending shifts during the pandemic, it’s important we don’t blur the lines between what’s personal and professional. The longer they stay intermingled, the more difficult it will become to manage them. Let’s explore some of the benefits of this money move.

The Tax Advantage

You know the old saying, “Nothing is certain in life but death and taxes.” Taxes pop up pretty much anywhere and everywhere money is involved. You owe them when you’re online shopping (sales tax) and when you’re making money from your business (income tax). Unless we do a deep dive into your personal taxes, we can only provide a high-level overview of the benefits of separating personal and business finances. Splitting the two means you’ll be able to take advantage of tax deductions for expenses on your business. This includes taking your client out to lunch, those gold paperclips you love, a task management program, or a virtual conference on bread making. Whatever expenses you acquire for your business, maintain a spotless financial record and keep the receipts. This is the best way to avoid getting audited—co-mingling the two creates the potential for a tax debacle. At the end of the year you’ll be so organized, your tax professional will thank you.

Time Is Money

Separating your personal and business finances ultimately saves you time and money, which we could all use a little more of, amirite? We recommend consulting the expertise of an accountant to truly get a grasp on balancing your books. By keeping your finances separated and organized, it will result in fewer billable hours with your financial team. Who doesn’t want to save large amounts of cash? If you are using a money management or business accounting software, separating your accounts will still help save you time throughout the process. At the end of the day, separating your finance early on and often will save you more time down the line. If anything were to go awry, you won’t be left hung out high and dry.

Strictly Business

You take your business seriously, that’s why you should take your finances seriously. Money is an emotional subject, especially when it’s connected to your company. By separating your professional and personal finances, you can give each category the attention it needs. Your business is no longer just a hobby, it’s your life’s work – then let’s develop your business identity. Having separate business bank accounts, credit cards and/or checks in your company’s name make you look professional. It shows your customers, clients, investors, and mother-in-law that you mean business.

How Do You Separate Personal And Business Finances?

Get ready to cash in with some of our best business practices. Now that you’re ready to make this important move, we’ll provide you easy-to-follow tips on how to make the money magic happen.

Make It Official

Are we talking Facebook official here? No, not quite. Remember when we were chatting about getting serious about your business identity? Well, that’s your first step to committing to the financial well-being of your business. In separating your personal and business finances, you’ll need to establish a legal entity to make it real. This includes filing for an LLC, C Corp or S Corp. If you’re not sure what’s best for you, be sure to check out tips from the Small Business Administration or seek out the advice from an expert. In addition, you’ll need to visit the IRS to apply for an EIN or Employer Identification Number. The legality of having an EIN depends on the sole proprietor’s situation, but it only takes a few moments to acquire one, so why not? By establishing your business as a separate legal entity, you’ll be able to protect all of your personal assets from things like debt or lawsuits. You need to protect yourself and your money, at all costs.

Bank On It

Congrats! Your business is official and now it’s time to separate your personal and business finances. If this is your first foray into the world of wealth management, it’s normal to feel a little lost and overwhelmed. You may feel like you have a lot of money issues to work out now that you’ve gotten to this point. Don’t pass the buck now, you’re doing great! Whether you’re working on a side hustle or small business, the next step is to open a bank account and credit card.

Make sure that these are used specifically for your business. Doing so allows you to stop making transactions from your personal account, preventing the lines between business and leisure from getting blurred. Ensure that any sales, invoices, payments, etc. are deposited directly into your business bank account. Any purchases you make including supplies, parking, cocktails with clients, etc. are made on your business debit or credit card. Seeing your statements this way will let you better understand how much you’re making, how much you’re spending and how much you need to invest back into your company.

Hesitant to open up another line of credit? Don’t be. Ideally, you should open the credit card up in your business’s name for solely business-related transactions. Come tax time, you’ll be organized and ready to go. This credit card will also come in handy when it comes to fraud and identity theft. If it’s in your business’s name, no thief will be able to access it. The goal is to protect your personal and business assets as best as you can. Go ahead, let’s take it to the bank.

Pay It Forward

Now that you’ve separated your personal and business finances with new bank accounts and credit cards, it’s time to pay yourself. Cha-ching! As a business owner, you need to pay yourself a salary in relation to your holistic money management approach. You need to put away money for savings, taxes, investing back into the business, etc. But, let’s not bother with the boring stuff and focus on the fun. By paying yourself first, you are actually prioritizing saving. Building up your savings is a powerful motivator that also provides mental benefits—you will feel more confident, motivated, secure, invested, and all-around happy. Watching the numbers go up is a great motivator. When you’re paying yourself for your hard work, that means your future is important to you. It also encourages you to make sound fiscal habits by moving savings to the forefront, instead of spending. It’s time to take your money and run, you’ve earned it.

Track Your Change

You’ve got your personal and business finances organized and you’re ready to rake in the dough. Unfortunately, you’ll need to do a little more money maintenance in order to level up your game. One of the benefits to owning your business is the ability to take tax deductions, as I previously mentioned. Having a personal chauffeur or a company jet would be ideal, but most of us are using the same car on Monday morning commutes. Tax deductions apply to your cell phone, electronics, parking, office space, etc. There are tons of items you use for both business and personal purposes. It’s important to keep detailed records so you can write these expenses off with the help of your tax professional. In addition, be sure to separate your receipts and keep them filed away. Use some good old-fashioned manila folders or utilize a digital platform, whatever your preference. The goal is to maintain your personal and professional money in a manageable way.

The truth of the matter is, it’s hard to determine how your business is doing if you don’t separate your personal and business finances. Here is another truth, every single dollar you spend, invest or save has an impact. Oftentimes, we don’t know what that impact is, whether it’s on your future or the collective whole. Determining that on your own can be a huge task. Taking these simple steps towards managing your money is a great start, but separating your finances is not always enough.

With the new normal we’re navigating, people are making conscious, intentional choices about money that can change your everyday life. Which is why at Alchemy Accounting, we work to support our clients with a comprehensive approach. If you aren’t 100% sure on your financial goals yet, it’s never too late. Maybe you want to explore Morocco, give back to a lifesaving organization or simply live out your days with a cold beer in hand. There’s no wrong answer, and we are here to help you make it happen. Money talks, we’re listening.

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Michelle Cooper

Michelle Cooper is a powerhouse entrepreneur, CEO of Alchemy Accounting & Bookkeeping, author of Confessions of a Money Rock Star, Your MoneyDate Journal, and co-author of the collaborative book, Women Rising. She has helped many business owners climb out of entrepreneurial poverty into the land of profit.