How to separate business and personal finances
To separate business and personal finances, run every dollar the business earns or spends through a business checking account and a business card. Pay yourself on a set schedule by transfer to your personal account, and pay personal bills only from there. When something slips, like a part on your personal card or groceries on the company card, record it the same week. The IRS says it plainly in Publication 583: "Use the business account for business purposes only."
Mixed accounts make your profit and loss statement lie. A month looks thin because the family's car payment ran through it, or fat because a job's materials went on your personal card. Brandon Vaughn, who coaches home service owners, told an owner who'd just incorporated what changes once the money is apart:
As soon as you start separating out those business and personal expenses, it's a lot easier to track what's actually happening. … look at the stats and know that it doesn't include any personal stuff. You don't have to always say, oh yeah, that's right, but I also did this.
The five steps, in order
- Open a business checking account in the company's legal name. Point your field software, card processor and every customer payment at it.
- Get one business credit card and pay it in full from that account every month. Give anyone who buys parts their own card on the same account.
- Open a savings account for money that's spoken for, like sales tax you've collected and what you'll owe in taxes. Move it out of checking on a schedule so the balance you see is closer to the balance you can spend.
- Pay yourself on a schedule, by transfer to your personal account, and pay every personal bill from there.
- Connect the accounts to your books and reconcile them every month, so a stray charge gets caught within weeks.
One card for every business purchase
Brandon ran his window cleaning company this way. Every purchase, down to the bleach, went on one company card with cards for the staff who bought things:
You can have authorized users. So you can have like your operations manager, your lead, … your office staff or whatever. They can have a card and you can set limits on how much they spend and everything.
And the part that keeps it from turning into debt:
…we bought everything on the company card. … And then we just paid this down in full every single month.
One card means one statement to reconcile, one place for receipts to match, and no personal card in the mix. Set a spending limit for each tech instead of lending out yours.
Pay yourself, then pay the house
Personal bills belong to you, not the business, even when the business could write the check. Brandon made the point with a mortgage:
Whatever you pay yourself in a salary, you're just going to have to need to make sure that it's high enough to cover all your personal expenses. You know, it's almost like if you decided the company was going to pay for your mortgage and the company would write checks directly to the mortgage company, it's a personal expense.
So set your pay to cover the house, then move it on the same day every time. Whether it's a draw, a distribution or a paycheck depends on how your company is taxed; settle that with a tax preparer who knows the trades. The habit is the same either way.
How to record the slip-ups
It's going to happen. Record it the same week, and none of these will throw off your books.
| What happened | How it's recorded |
|---|---|
| $86 of fittings on your personal card for a job | Business expense, and the business pays you back |
| $140 of groceries on the business card | Personal, so it's an owner draw (or you pay the business back) |
| $5,000 of your savings into the business in slow season | Owner contribution or a loan from you, never income |
| Your mortgage paid from the business account | Owner draw, not an expense |
| A personal item on a supply house receipt | Split it: the parts are a business expense, the item is a draw |
Draws and contributions land in equity accounts on your balance sheet, not on the P&L. The chart of accounts post shows where each one sits.
Common questions
Do I need a separate account as a sole proprietor?
Open one anyway. IRS Publication 583 calls a business checking account one of the first things to set up and says to keep it separate from personal checking, and it's the simplest way to show which deposits and expenses belong to the business.
What if my accounts are already mixed?
Go month by month. Tag the business transactions, record the personal ones as draws or contributions, and open the new accounts so the problem stops growing. If you're more than a few months behind, YetiBooks cleans up the books in about two weeks, and here's how that works.
If your business and household money have been sharing an account, bring a recent statement to a free profit call and we'll show you what the real month looked like. We do this for landscaping companies and every other trade with trucks on the road.
