Small Business Tips
How to Separate Personal and Business Finances (and Clean Up if You Have Not)
Quick answer
Open a business bank account and a business card, pay yourself through owner draws or payroll, and stop paying personal costs from business accounts. For past mixed transactions, identify each one, move personal items out of business expenses into owner draws or distributions, and ask your CPA how any gray areas should be treated.
Almost every business starts mixed. A personal card pays for software, a business account pays a grocery bill. It works until someone needs clean numbers: a lender, a buyer, or your CPA at filing time.
Why it matters
- Reports stop being reliable. Profit looks lower or higher than reality when personal items sit in expenses.
- Tax preparation takes longer. Someone has to sort what belongs in the business.
- Lenders and buyers ask for clean books. Our guide to loan-ready books covers what they look for.
- Legal protection can be questioned if the business and owner are treated as one. Ask an attorney about your structure.
Set up the separation
- 1Open a business checking account and a business credit card.
- 2Route all customer payments to the business account.
- 3Pay business costs only from business accounts.
- 4Pay yourself a set amount by owner draw or payroll, depending on your structure and your CPA's advice.
- 5Keep receipts for anything that is not obvious from the description.
If you used a personal account for business
Record the business spending as an expense, and record it as owner-funded, such as a contribution or amount due to the owner, as your CPA advises. Do not simply ignore it, because the cost is still a business cost.
If you used a business account for personal spending
Reclassify those items out of expenses and into owner draws or distributions. Do not leave personal spending in business categories to reduce reported profit. Your CPA can tell you what is deductible and what is not.
Gray areas
Phone plans, vehicles and home office costs are often partly business and partly personal. The right treatment depends on the rules that apply to you. Keep records, and decide the approach with your CPA before the year ends. See small business tax deadlines for the calendar.
Getting help with the cleanup
A simple weekly habit
Separation works best when it is a habit and not a cleanup project. Once a week, open the business account and check that every transaction is business related. If a personal expense slipped through, record it as an owner draw or a reimbursement right away, while you still remember what it was.
Keep your business card for business only, and do not use it for a one-off personal purchase just because it was in your wallet. One stray charge creates a question at year end, and questions cost time to answer.
If months of mixed transactions are in your books, catch-up bookkeeping can sort them. For ongoing work in your own QuickBooks or Xero file, see monthly bookkeeping or contact us.
Frequently asked questions
Do I need a separate bank account if I am a sole proprietor?
Rules vary, and a separate account is not always required for a sole proprietorship, but it makes your books and taxes far easier. Ask your CPA about your situation.
Is paying myself from the business account an expense?
Owner draws are not an expense. Wages paid through payroll are. Which applies depends on how your business is set up.
Can I deduct my phone and car?
Possibly the business portion. That is a tax question for your CPA, and records of business use are what they will ask for.
What if I already mixed several years?
Start with the current year, then work backward with your CPA on whether prior years need correction.
Can I pay myself from the business account?
Yes. Pay yourself in a way that fits your entity type, such as an owner draw or payroll, and record it correctly so it is not mixed with expenses.
What if I already mixed everything together?
Do not panic. A bookkeeper can sort the history, record personal items as draws, and set up clean accounts going forward.
Keep reading
Business Financing
How Accurate Books Can Increase Your Chances Of Getting Approved For A Loan
Lenders told us the number one reason solid businesses get turned down is not bad credit — it is books that do not tell a clear story. Here is what lenders look for and how to get your books loan-ready before you apply.
Tax & Compliance
Small Business Tax Deadlines to Know (Monthly and Quarterly Checklist)
Miss a tax deadline and the penalties add up fast. This checklist covers the monthly and quarterly deadlines every small business owner should have on the calendar.
Freelancers
Bookkeeping for Freelancers — The Complete Guide
Freelancer bookkeeping is different from standard small-business bookkeeping — irregular income, quarterly estimated taxes, and commingled accounts. Here is exactly what to track, how to separate your money, and when to stop doing it yourself.
Written by
Moshe
Senior Account Manager, Mispar
Moshe is a Senior Account Manager at Mispar who works directly with small business owners and freelancers to keep their books clean, reconciled, and tax-ready every month.
More about Mispar