When you first started your small business, chances are you were excited to plan things. Spreading the word about your big launch, perfecting your offer, and even solidifying your branding colors are all part of the fun of entrepreneurship. On the other hand, you may have skipped over things such as separating personal and business finances. Even if your business is thriving, you might struggle to keep track of the money coming in and going out. 

Even if finances may not be your area of expertise, it’s an important part of running a business. To analyze how your business is doing, set goals, and plan for scaling, you need to keep accurate, up-to-date records of your business cash flow. And, there are two main reasons why separating your personal and business finances is essential. We’ll explain them both as well as the steps you can take to keep your finances separate.

By the books

Although there are a number of reasons you might need a separate account for your business’s finances, there are two main ones that are important to keep in mind: taxes and personal asset protection.

Taxes: This is arguably the most important reason. Separating personal and business finances help simplify filing when tax season rolls around. When your personal and business finances are intertwined, you run the risk of issues. These can show up as missed deductions and improperly reporting income, which may lead to financial trouble further down the road. 

Personal asset protection:  In the case of litigation or financial trouble with a vendor or creditor, you put your personal assets (i.e., your home, savings, retirement, etc.) at risk when you haven’t fully separated your business finances from your personal assets. 

Getting a hold of your business finances may seem like a daunting task. Still, it’s important for your overall financial health. And it all starts with simply separating your personal finances from your business finances. 

Defining details

As the name suggests, personal finances encompass everything that pertains to your personal life and well-being. Everything from that trip you’re planning for your birthday to your cost of living is considered personal items. According to Investopedia, personal finance is “about meeting personal financial goals, whether it’s having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. It all depends on your income, expenses, living requirements, and individual goals and desires—and coming up with a plan to fulfill those needs within your financial constraints.” 

On the other hand, business finances refer to things required to run and grow a business. From revenue from your online course to money you may be spending on advertising. To put it more plainly: “Corporate finance involves managing assets, liabilities, revenues, and debts for a business.”

Steps to separating finances

Step 1. Save all receipts and track spending

If you haven’t made it to a place where you set up your business as an entity and can open separate accounts, start small. Begin by tracking your business’s expenses and income. A simple budgeting sheet or tracker is all you need to record every dollar you spend on your business and every dollar coming in. 

On your budgeting sheet, you can keep track of everything from subscriptions you may use to run your business (i.e., Canva, G-Suite, Teachable paid plan, etc.) to money spent on props for a business-related photoshoot. 

When tracking receipts, try taking photos and screenshots of your receipts and creating a folder on your computer or your favorite cloud-based service to have them all in one place. Keep in mind that physical receipts tend to fade, so this is especially important. 

Step 2: Determine when you’re using personal items for your business needs 

As much as you may love to find an office and open up a business phone line on day one, that’s not feasible. In the beginning, your personal items (i.e. home office, phone, car, etc.) may help run your business. Do your best to track how often you use personal items for business purposes so you can properly report these items as potential deductions comes tax season.

Step 3: Make it official

Before you can create a business bank account or open a business credit card (more on that later), you must first set up your business as an entity (LLC, S-corp, etc.). Once your business is structured, you can apply for an Employer Identification Number. Like a social security number, an EIN is a unique nine-digit number that identifies your business. Once the government recognizes your business as “official” on paper, you can put your best foot forward to separate your personal and business finances once and for all. 

Step 4: Open a business bank account

To really separate church and state, aka business and personal expenses, you must create “separate houses” or bank accounts. Having a designated account for your business makes keeping track of personal vs. business transactions simpler.

Once you have an EIN issued, you can look into banks that suit the needs of your business. Similar to a personal bank account, there are some things you may want to consider when looking for a bank for your business. These include:

  • minimum daily balances requirements
  • transaction fees
  • transaction limitations

Make sure all business-related expenses or income are managed through this specific account and no longer your personal account. 

Step 5: Consider a business credit card

Before you think to yourself, “I don’t need another credit card,” keep in mind that a credit card linked to your business doesn’t affect your personal credit. Additionally, a business credit card should be used responsibly to cover expenses and purchases that can help your business grow and nothing more than that.

Generally speaking, business credit cards have very attractive introductory and spending rewards, higher credit limits, and purchase protection for damaged or stolen items purchased with your credit card. 

One of the biggest reasons to consider getting a business credit card is to start building a business credit history. This may come in handy if you’re ever searching for a business loan or funding. Establishing a solid credit history early in the game can make or break your ability to find funding when you need it most. 

Step 6: Find an accounting system

When it comes to tracking finances, it can be as simple as just creating a spreadsheet. On the other hand, when your business finances become more robust, you can opt to use accounting software. One beginner-friendly option is Quickbooks, which allows you to link your bank accounts to import transactions with a few clicks. Accounting for your business doesn’t have to be overly complicated at all. 

And remember, never be afraid to speak to a financial expert who can give you specific advice about your business financial situation. 

Editor’s note: This is not financial advice. Please consult your accountant or financial advisor on any financial decisions regarding your business or personal finances. Teachable does not provide financial advice and this should not be taken as such. This article is for informational purposes only and does not provide any legal or tax advice.