How to separate business and personal finances in 6 simple steps

When your business and personal finances are mixed, accounting and taxes can become hard to manage. How do you reconcile expenses when your personal gym membership and business software subscription are being charged to the same credit card?

This scenario is all too common: 47% of Americans participate in a side hustle, but less than half track business expenses, and just 26% hold a separate business bank account.

Fortunately, splitting your personal finances from your business finances is easy. From why it's important to separate personal and business finances to how to separate your business and personal finances, we’ll walk you through the process step by step.

Why you should separate business and personal finances

It is important to separate your business and personal finances for bookkeeping, legal, and reputational reasons. This is true for all businesses, regardless of size.

Let’s say you want to know what your business's cash flow looks like. When personal and business expenses are combined, you can't generate precise future projections. Maintaining a separate business bank account allows you to use tools like QuickBooks Online Cash Flow Planner to deliver real-time insights into your business’s financial health and predicted cash flow.

Financial separation is also important for legal reasons. As a business owner with mixed finances, if you lose a legal battle, the court can also seize your personal assets, like your home or savings. With separate finances, you can set a clear distinction between which assets belong to the business versus you.

Another factor to consider here is that lenders and investors expect to see clean general ledgers. Cluttered business accounting that includes personal expenses like streaming subscriptions or takeout can impact your professional image.

Sole proprietors vs. LLCs: Is financial separation required?

Depending on your business structure, the degree to which you are required to separate your personal finances from your business finances will vary.

Here's a quick summary of the legal, tax, and banking separation guidelines.

For sole proprietors, separating personal and business finances is not legally required; however, it's often beneficial. Beyond simplifying your bookkeeping and sole-proprietor tax preparation, this separation fosters a professional reputation that signals to investors and banking institutions that you are serious.

How to separate your finances in 6 steps

Separating your small business finances from your personal ones is best done from the start. Let's review the six steps you should take to ensure financial separation for clean accounting and legal protection.

Step 1: Establish a legal business entity and get an EIN

The first step is to establish your business as a separate legal entity from yourself. How you do this will depend on your business structure. 

As an LLC or corporation, the first action will be to file your formation documents with your state and apply for an EIN. During this process, you can select and register your name as well as specify your registered agent (the person who receives official communications). Once your LLC application is complete, in the eyes of the law, your business will be viewed as a separate legal entity. 

With your registered LLC name, you can then apply for an EIN (Employer Identification Number). This free-to-obtain federal ID number not only helps separate your finances, but it is also required to open a business bank account and file taxes. 

Step 2: Open a dedicated business bank account

The next step in the financial separation process is to open a dedicated business bank account. You can open a traditional checking account or use the QuickBooks plan that fits your needs.

With a QuickBooks checking account, you’ll be able to send invoices, schedule payments, view your balance, and predict your cash flow in real time. Plus, you'll have access to native AI that can help you manage your finances better as it learns about your business. For instance, Payments AI can help you adjust your invoicing and scheduled payments to optimize cash flow.

Your business bank account is where you'll record all your business transactions (income, payments, etc.). If you choose a traditional business checking account, you can still link to QuickBooks and import your data. The AI-powered tools can then automatically categorize and reconcile all of your transactions. 

Step 3: Silo your digital payment profiles

Once you have your business banking set up, it’s time to use your new account information to set up your digital payment profiles. All payment platforms you use should now route payments and invoices through your business checking account.

If you’ve previously established accounts with peer-to-peer payment platforms like Venmo and PayPal, you’ll want to create separate dedicated business profiles. This helps ensure Form 1099-K compliance and prevents business payments from being erroneously flagged as gifts. 

Step 4: Automate your expense workflow

Now that you have your business bank account and digital payment profiles set up, it’s time to optimize your expense workflow. Automation is key. To achieve this, you’ll want to link all your accounts (bank, payment platforms, etc.) to QuickBooks. You should also consider using business-only payment methods for purchases, like a business credit card.

Once everything is linked, you can set up rules in QuickBooks that will automatically categorize every purchase and payment, eliminating the need for manual entry and reconciliation. The result is zero-touch bookkeeping, which improves your accounting accuracy and frees you up to spend more time on the other important aspects of running your business. 

Step 5: Establish a formal owner's draw or payroll

As a part of separating your business and personal finances, it's important to avoid paying personal expenses directly from your business account. This is where getting a paycheck comes in. 

In Intuit QuickBooks Workforce Payroll, there are two ways to do this, depending on your business structure. 

• Owner's Draw (sole proprietors & LLCs): You’ll first need to create an Owner’s Equity Account in the Chart of Accounts. When you are ready to withdraw money, create a New Check from your dashboard and categorize it as an Owner’s Draw. You can then print and deposit your check.
• Workforce Payroll (S-Corps & LLCs electing corporate taxation): First, set yourself up as an employee in the Employee Center. You can then go to the Payroll menu and Run Payroll. In your employee profile, enter your hours worked or salary amount. Then Submit Payroll.

Using the above methods will help you in keeping your personal and business expenses separate, keep you compliant with tax laws, and help you track pay as part of business liabilities.

Step 6: Use expert-assisted setup

Setting up everything needed for separating your business and personal finances can be time-consuming and nerve-wracking. If you need a little extra guidance or just want an expert eye to review your setup, consider using Intuit Expert as the final step in your process. 

The live experts can assist you with everything you need to set up your finances accurately from day one. From mapping your accounts to reviewing your payroll settings, expert-assisted setup of your business finances can help give you peace of mind. 

How to fix mingled business and personal finances

What if you’re already running your business and using one account to manage both your personal and business expenses? Will you need to start over? No, with a few simple steps, you can fix your finances.

Start by reviewing your transactions and tagging entries as Personal or Ask My Accountant if you are unsure whether or not the transaction qualifies as a business one. If you have transactions where part of the expense qualifies as business, you can split the transaction and categorize the amounts separately as personal vs. business.

If you have transactions in which you transferred or withdrew funds for personal reasons, you should categorize them as Owner Draws.

Next, once you’ve opened a dedicated business checking account and credit card, you should link these to QuickBooks and unlink any personal cards and accounts. From now on, you should use only these accounts for business transactions.

Does your business have a large volume of transactions to sort through? Or do you need help fixing the previous year’s accounting or have tax compliance concerns? If so, reaching out to Intuit Live Expert Cleanup can be a valuable time-saver.

Spend more time growing your business

By separating your business finances and personal finances, you can waste less time on accounting and tax prep and spend more time focused on growing your business. QuickBooks Online can take your accounting to the next level, with automation and AI tools that do the bulk of the work for you.

With QuickBooks bookkeeping and accounting software, you can reclaim your time and focus on what matters most: scaling your business.