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Business Finance: Why Business and Personal Accounts Should Be Separate

Oct 25, 2023

It’s not unusual for new small business owners to use their personal bank accounts instead of a business checking account, business savings account, or business credit card for work-related endeavors. The convenience of writing a personal check, swiping the family credit card, or a fast-cash withdrawal from the closest ATM seems practical at the moment. But personal and business finance matters should never cross paths and new entrepreneurs tend to learn that lesson the hard way.

Avoid that costly mistake by considering these essential reasons why separating personal and business finance items could help you turn higher profits, grow the operation, and establish a reputation for professionalism.


Business Finance 101: The Benefits of Keeping Your Business and Personal Accounts Separate

The benefits of distinguishing personal and business endeavors go to the very heart of why an individual or group establishes a business entity. The legal status afforded by conducting business operations through a sole proprietorship, partnership, corporation, or an S corporation, protects the owners from financial liability in many cases.

Sometimes referred to as the “corporate veil,” business owners and investors cannot necessarily be the subject of civil litigation based on something done by the company. But when the personal and business finance lines become blurred, a case can be made that the business and owners are one and the same. This legal maneuver is called “piercing the corporate veil.”

Failure to draw a distinct line between business and personal finances, as well as assets, could result in civil litigation. On a more positive note, the following are perks to keeping business and personal financial matters separate.

Maximize Business Deductions

Paying for things with cash on the fly, or swiping a personal credit card, makes it very difficult to determine business expenses from personal ones. The IRS is unlikely to accept a scrap of paper that explains you paid so-and-so cash for services rendered. The same holds true for things like using a personal gas card to fuel company vehicles and equipment. Many of these otherwise legitimate business expenses could be disallowed as deductions. That means you may not receive the tax reduction you deserve. You would be much better served to open a business bank account linked with a business debt card or apply for a business credit card to track your itemized expenses.


Streamline Business Accounting

Allowing personal and business finance to overlap typically results in incoherent bookkeeping. Habits such as pocketing cash and handling expenses on the run do not translate to concise accounting. What generally occurs when the business and personal lines become blurred is a time-consuming overhaul that will ultimately cost you time and money.  Avoid going through a year's worth of receipts to determine which are business versus personal related. Whether you take on this task yourself or pay another employee or accountant, time is money.  Although it may seem tedious to pay only from business banking resources, the end result makes accounting far more efficient.


Measure and Track Performance

When you maintain separate receipts and payments it is easier to understand how your business is performing. The benefits of monitoring your business's cash flow are invaluable and will allow you to react or adjust in a timely manner.


Meet Legal Requirements

Specific state and federal requirements may apply depending on which industry your business is in or which type of business structure you have established. The information you need to apply, or for future tax filing will be much easier to access and, most likely, more accurate if you maintain separate business records. A separate business bank account is required for some business entities. 


Build a Corporate Image

No one gets a second chance to make a first impression and business formalities make a difference. As you build your organization and brand, customers and members of the business community notice how your operations are conducted. If they see professional corporate checks and credit cards with the company’s name being used, that can indicate you’re organized and professional.


Build Business Credit

Experienced entrepreneurs and industry leaders often suggest that a startup would be well-served to apply for a business line of credit as soon as it receives a Federal Tax ID Number. That may sound counterintuitive, given the organization is in its fledgling stage. But access to a line of credit or small business loan can help first-year companies get through rough patches, invest in growth, and take advantage of opportunities. Maintaining pristine accounting and paying bills on time improves company credit scores and access to business lines of credit and lower-interest loans.

Business Finance Tools to Keep Your Accounts in Order

Keeping personal and business financial matters separate starts with integrating the tools necessary to remain organized. If you are considering launching a new venture or transitioning a side hustle into a legitimate company, it’s essential to seek support from a local lender. Local financial institutions have the resources and scalable services to help maximize profitability, project a professional image, and avoid the pitfalls associated with mixing money and assets. They are invested in your business as much as you are because when you succeed, they succeed, and your shared community thrives. Here are some essential tools small business leaders should consider to start their business off on the right financial foot.

Business Checking Account

A business checking account provides a central resource from which expenses can be paid and revenue deposited. Few business finance tools deliver this level of organizational opportunity when consistently used. A local and trusted lender typically offers a variety of business checking account options that may include no minimum balance requirements, nominal or no fees, and unlimited check writing, among others. Be sure to check with your local financial institution to see if a free business checking account is an option.

A secure business checking account is FDIC insured up to $250,000. Companies can also get a business debit card that provides convenient purchasing power without interest accruing on transactions. Opening a corporate checking account represents a fundamental step in separating business and personal finance matters, as well as achieving your goals.

Business Savings Account

A business savings account serves a vital function when building an organization. It’s not uncommon for an outfit to consistently move approximately 10 percent of the monthly profits into an appropriate savings account. The fund can be tapped during unanticipated slowdowns or to purchase additional inventory in advance of a sales push.

Saving money and having cash on hand help improve business creditworthiness, enabling a company to secure a business line of credit or low-interest loan.

Other Cash Management Options

One of the issues that holds startup operations back stems from the amount of time and effort required to manage money. Entrepreneurs and other visionaries bring innovation to the venture, and they need to maintain a laser focus on goal achievement. Getting bogged down in sometimes tedious cash management processes proves distracting.

Wide-reaching money management services do exist that allow industry leaders to move a company forward. Options such as online and mobile banking, free ATM access in the business region, the ability to make wire transfers, reliable merchant services, 24-hour telephone banking, and digital check deposits reduce the time spent on cash management. These and other services also help upstart organizations to keep personal and business finance matters separate.

By working with a trusted local lender who understands the challenges of small businesses, you can be sure to find the solutions your business needs to be successful.


Consolidated Community Credit Union is The Right Credit Union for Your Business

If you are seeking the perfect business banking solutions, including bank accounts, loans, and cash management options, to support your enterprise, Consolidated Community Credit Union is here to assist you. Feel free to reach out to us or visit one of our conveniently located branch offices today.