Finances and Taxes

How to Keep Your Business and Personal Bank Accounts Separate

Andi Smiles Small business financial consultant 
How to Keep Your Business and Personal Bank Accounts Separate

Whoever said starting a business was fun clearly never sat through hours of bookkeeping, aka sifting through a shoebox of receipts and piles of bank statements. They’ve probably never frantically tried to add up their expenses the day before taxes were due, or figure out if “lunch with Bernie” was deductible or not—six months later.

True story: Keeping your numbers organized is a full-time job within the full-time job of running your business.

Unless, of course, your numbers are organized from the beginning.

One of the most important things you can do to organize your finances is set up your bank accounts correctly right from the start. Here’s a step-by-step guide to setting up your business bank accounts:

Step 1: Open a business checking account

You’re never too small to open a checking account for your business. Even if you’re just getting started and don’t have revenue, a business checking account that is separate from your personal checking account is crucial to bookkeeping success.

Having a separate business account ensures that all your business expenses are corralled in one place. Rather than going through 100 expenses just to identify five charges for your business, you have all five transactions laid out for you. This makes tracking and categorizing your expenses for taxes WAY easier.

When you use your business account just for business expenses, you know that every single expense in your account pertains to your business. No more sifting through receipts and calendar entries to figure out if that order on Amazon was business-related or personal.

You should only use your business checking account for:

  • Depositing business income
  • Business expenses; this includes payroll, contractor payments, and investments in furniture or equipment
  • Business credit card payments
  • Business loan payments
  • Transferring money to business savings accounts
  • Paying yourself every two weeks or every month

You should not use your business checking account for:

  • Depositing employee income (aka your W-2 income if you pay yourself as an employee) or personal money you receive as a gift
  • Personal expenses when your personal checking account balance is low (this account is not a fallback for personal expenses)
  • Personal credit card payments
  • Personal loan payments (I’m looking at you, student loans)

New business owners always fight me on this. They complain that it’s too much work to have another checking account to keep track of. It’s only after going through six months of jumbled personal and business expenses that they come back saying, “You were right! I never want to do that again!”

If you’re resisting opening a business checking account, imagine spending twice as long on your bookkeeping EVERY MONTH. Real talk—that’s what happens when your business and personal finances are mixed: bookkeeping hell. Save yourself the stress and just open a separate account.

Step 2: Open a business savings and tax savings account

There are two types of savings accounts every business needs: a general savings account and a tax savings account:

  • A general savings account is for all the fun stuff you want to buy in the future but don’t have the cash for yet. This could be large investments in your company like equipment, new hires, or a product launch, an emergency fund for your business, or giving yourself vacation and sick pay.
  • A tax savings account is only for money that you’re saving for taxes (duh!). That means all the money you transfer into this account is 100 percent off limits. No dipping in when you want to make a large purchase (wrong account, bro!). No skimming off the top when there’s a sale on your favorite office supplies. And no transferring funds to your personal account when you need a little extra. Think of your tax savings account as having a giant “No Trespassing” sign on it.

Keeping your general business savings and tax savings separate will give you a better idea of how much you actually have saved up to use. If you have $10,000 in one savings account, you might feel like you have plenty of savings. But if $9,000 of that is for taxes, then you really only have $1,000 in savings—which means that $2,000 desktop you’ve been lusting over is a no-go.

A good way to think about the difference between these two accounts is that a general savings account is a long-term savings account, while a tax savings account is a short-term savings account. The tax savings account is meant to be drained on a quarterly basis to pay your estimated taxes. The general savings account is meant to grow over time so you’re financially ready for large purchases.

Pro tip: Some business owners find it helpful to have one or both of their savings accounts at a different bank than their checking account. This makes it harder to impulsively draw money out of the accounts and forces you to slow down before you do anything rash.

Step 3: Decide if you will open a business credit card

The most important component of this step is deciding if you’ll open a business credit card. You DO NOT need to open a credit card, and not every business benefits from a credit card. Take the time to assess your credit card personality before you press Apply.

Your credit card personality is a reflection of your track record with credit cards. Be honest with yourself about how credit cards have impacted your spending in the past.

First, look back at your history with credit cards:

  • How many credit cards have you had in the past?
  • How often do you open a new credit card? What are the circumstances for opening a new card?
  • Have you missed credit card payments? Have any of your past credit cards been closed?
  • If so, what changes have you made to avoid missed and overdue credit card payments?

Next, review your spending habits with a credit card:

  • Do your spending habits change when you have a credit card? How so?
  • What types of purchases do you tend to make on credit cards? (Are they day-to-day essential items? Items you can’t afford? Items that you never use?)
  • Do credit cards tend to make you overspend?
  • Do you think of credit cards as not “real money”?
  • Are you able to stick to your budget when you have a credit card?

Finally, reflect on your patterns with making credit card payments:

  • Are you consistent with paying off credit cards?
  • Do you pay your balance in full every month or just the minimum payment due?
  • Do you prioritize paying your credit card bills, or do you spend money on something else?
  • Do you struggle to make minimum credit card payments every month?

Using the answers to these question, assess if you’re ready for a credit card. If opening a business credit card is likely to send you into a downward spiral of debt, don’t do it! Walk away from the pre-approved letter and wait. The credit card will still be there in a year.

If you do decide to open a business credit card, just like your business checking account, it should be used exclusively for business purchases. It’s just as much of a drag to sift through a mixed-use credit card as it is a checking account.

Still not convinced that separating your accounts will make your life easier? Then here’s a little extra incentive:

Remember that when you pay for any of your personal expenses with revenue from your business, those funds could be counted as taxable income. If you lose track of those amounts and end up underreporting your income to the IRS, that could spell big trouble for you. Small businesses are especially susceptible to being audited by the IRS and state revenue agencies for this precise reason.

But with these three simple steps, you’ll be ahead of the game and well on your way to bookkeeping glory. Instead of staying up until midnight STILL trying to figure out who the heck Bernie is, you’ll breeze through your bookkeeping knowing that everything in your business accounts is a legit expense. Even Bernie—wherever he is.

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Andi Smiles
Andi Smiles Andi is a small business financial consultant and coach who teaches business owners to take control of their finances. She’s helped hundreds of self-employed folx organize and understand their business finances, while also uncovering their emotional relationship with money.
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