4 Best Practices for Keeping Business and Personal Finances Separate
Business and personal finances mix like oil and water. For most small businesses, the need to separate personal and business finances is due to a number of legal and accounting factors. For example, making a commercial purchase, even a minor transaction such as buying office supplies, with a personal credit card can expose individuals to personal liability. Follow these four best practices for achieving a proper separation between business and personal finances:
- Establish a separate legal entity. Find the legal framework that makes sense for your small business, whether it’s a sole proprietorship, partnership, limited liability company, or corporation. This may require assistance and input from a lawyer and accountant. The decision will depend on several factors, such as the number of employees you plan to hire, business activities, financing needs, and whether you have a business partner.
- Open separate business accounts. Opening a dedicated checking account for your business and obtaining separate business credit cards can make it easier to keep business and personal finances separate.
- Maintain separate expense records. Avoid financial transactions that cross the line between personal and business assets. For example, real estate transactions for a business should always be recorded in the company's name rather than in the owner's name. Using an online accounting system for your business finances can help keep the boundaries clear. Whenever there is doubt about whether something qualifies as a personal or business item, small-business owners should consult an attorney or accountant.
- Avoid personal guarantees for business loans. Personal and family assets and credit can be at risk if you provide a personal guarantee for commercial financing — for example, using a home equity loan to finance business startup expenses. Avoiding this scenario can be difficult if you’re applying for Small Business Administration loans, as they sometimes require personal financial guarantees. One solution is to explore financing alternatives that allow your company to borrow money without the requirement of personally guaranteeing the loan.
Keeping your business and personal finances separate can be challenging, especially at the beginning stages of a new business, but a modern accounting system can help make the task easier.