5 Simple Ways To Separate Your Personal and Business Finances

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Effective financial management is crucial to good business management. But handling business finances is often a learning process for new entrepreneurs, especially when it comes to keeping personal and business finances separate.

Research shows some small business owners don’t have a separate business credit card. According to one 2022 survey on business credit usage, only 20% of business owners had a credit card, and 42% of respondents said they’d had the card for less than a year.

The research suggests small business owners are likely using either personal savings or a personal credit card to cover their business expenses. Commingling business and personal finances can make managing your overall business more complicated. Here are five simple ways to help keep them separate.

Open a separate business bank account

If you haven’t done it yet, open a dedicated business checking account to manage your business income and expenses. Keeping everything separate from personal banking can simplify bookkeeping, accounting and tax management. You’ll be able to clearly see how much revenue you’ve made in a given period, your monthly overhead and financial trends in your business.

Many business bank accounts now come with built-in financial management tools for budgeting, cash flow tracking and forecasting, so opening a separate account can help streamline your business’s financial operations.

Apply for an Employee Identification Number

Nearly everyone has a Social Security number but when it comes to business, it’s best to use what’s called an Employee Identification Number (EIN) to maintain separation between your personal and business identities.

Instead of your Social Security number, you’ll use this number on your W-9 form for clients during the onboarding process to set up payments. You’ll also use an EIN on your business tax return or the Schedule C on your individual tax return.

Getting an EIN only takes a few minutes through an online application. Many banks require an EIN to open a business bank account.

Use a business credit card

As the research shows, only two out of 10 business owners use a business credit card. However, this issue is more prevalent among some business owners who have traditionally lacked access to business credit and services. For example, only about 25% of Hispanic-owned small businesses have a business credit card, compared to 41% of non-Hispanic businesses.

A business credit card can help you keep track of business-related transactions in one place, so you can see how much you’re spending and where to cut back if needed. A business credit card can build your business’s credit profile, which is important if you ever need a loan. Opening a business credit card with a local or online bank can help you establish a relationship with that financial institution that could serve your business well over the long term.

Just be mindful about how and when you use the card, and that you fully understand what the IRS deems an allowable business expense. Otherwise, you may unknowingly make charges that aren’t tax deductible for your business.

Use accounting software

Though your business bank account may come with integrated financial tools, purchasing separate accounting software can give you access to more sophisticated features and capabilities, which could be beneficial if you want more granular details or your business finances are more complex.

Accounting software can provide an all-in-one financial management solution for expense tracking, invoicing and financial reporting. By handling only business-related transactions, such software can ensure greater accuracy for activities such as categorizing expenses, annual tax filings, quarterly estimated tax payments and even complying with a potential audit.

Consult a professional

As a business owner, you’re likely focused on overseeing your day-to-day operations, getting products out the door and serving customers. Managing your small business finances on top of all these responsibilities can be overwhelming, which is why it never hurts to get help from a financial professional.

According to a National Federation of Independent Business survey, only 41% of business owners regularly talk to someone at their bank about their business’s finances. Separate industry research indicates less than half of small business owners (48%) are confident they are correctly paying their taxes.

Getting advice from an accountant, financial advisor or business banking specialist at your bank can help with tax compliance and financial planning, and can help ensure you keep your business and personal finances separate to maintain accurate financial records.

A better approach to business financial planning

Effective financial management can help you build a stronger business. While it requires some initial upfront work, set aside time to apply for an EIN, open a dedicated business bank account and business credit card and purchase accounting software to streamline financial management. Working with a trusted, experienced financial professional also can help you build a more financially sound business.

Taking all these steps can help you avoid mixing business and personal finances and keep your business financially on track. Now that you have read some financial tips for your business, consider contacting a State Farm® agent to learn more about small business banking products or for small business insurance information, and find more tips and resources at NBCU Open Doors.

Contact a State Farm agent to learn more about small business insurance.