We’re going to let you in on a secret: figuring out how to separate business and personal expenses is something that will save you a massive headache down the line.
While it might seem easy to combine your business expenses with your personal ones when starting a business, doing this can leave you and your business exposed to challenges in the future, especially during tax season and concerning asset protection.
To put it bluntly, it’s a shortcut that will quickly turn into a battle.
How to separate business and personal expense
Don’t worry, setting up your business finances isn’t as hard as seems. To help you figure out the best course of action, we’ve rounded up a list of seven things you can do if you’re wondering exactly how to separate business and personal expenses. Let’s dive in.
1. Get your employer identification number (EIN)
The first step when working out how to separate your business and personal expenses is to protect yourself by getting an employer identification number, or EIN. You can use this number to do many things concerning your business, including establishing your business type, applying for bank or cash management accounts and credit cards, and filing your business tax returns, all of which we cover later in this guide.
Your EIN—which can also be called federal employer identification number (FEIN) or federal tax identification number (FTIN)—is nine digits long and allows the IRS to identify your business for tax purposes.
Getting an EIN is mandatory for many business types, such as partnerships or any business with employees, but it is not compulsory if you are a sole proprietor. That said, getting an EIN is still helpful if you’re a sole proprietor. Without an EIN, you’ll need to use your Social Security number (SNN) for your business purposes. An EIN makes it easier for business banking and loan applications, and helps keep your SSN private. And, if you want to change your business structure later on, for example, hiring employees, you already have the EIN.
Applying to get an EIN is a free service done online via the IRS. It’s a straightforward application and you will receive your EIN immediately.
2. Register your business: sole proprietorship, LLC, or corporation?
The next step in learning how to separate business and personal expenses is registering your business and choosing the right type of structure. There are different business structures, including sole proprietorships, LLCs, and corporations. Each of these offers different legal and financial protection levels that could be key to keeping your personal finances safe. Let’s learn a little about each.
Sole proprietorship
Sole proprietorship is a standard business structure, particularly among small business owners. It doesn’t cost much, and it’s very straightforward to set up.
A disadvantage of registering as a sole proprietorship is that, as the owner, you do not have any government protection. You are solely responsible for any liabilities the business encounters, including debt, profit losses, and legal challenges.
Limited liability company (LLC)
An LLC is another popular business structure for small businesses. The application process is not complicated, and the fees are minimal. You can set up an LLC as a sole proprietor or as a partnership.
An LLC helps separate business and personal expenses because it gives you, the owner, a layer of protection that means you cannot be held personally liable for your business debts or legal problems. For example, if someone sues your business, you will not be forced to give up personal assets such as your car, home, or savings to cover this debt.
However, it’s important to note that you can lose the protection an LLC offers if you pierce the corporate veil. For example, by mixing your business and personal expenses and attempting to use your LLC structure to avoid liability.
Corporations
A C corporation is a type of structure where business owners—called shareholders—are taxed separately from the business. Although many big brands are C corporations, small and medium businesses can also be corporations.
Much like an LLC, running a C corporation means you have limited liability for the owners, which protects your assets in the event of debt, loss, or legal claims.
3. Open an account for your business finances
If you’ve been wondering how to separate business and personal expenses. The most significant step you can take to avoid mingling them is to set up a business cash management account. This should be done as early in your business journey as possible to set up good habits and clear finances from the start.
A business account allows you to collect and make payments related to your business, including paying bills, buying materials and equipment, and taking cash on sales.
If you're running your business through Shopify, you can open a free Shopify Balance account. This allows you to manage your store and business finances from the same place, with no monthly fees. Setting up a Balance account takes minutes and can be done online. You’ll receive a virtual card instantly, so you can start making business purchases right away. Or request a free physical card with your business’s name on it and wait for it to arrive in the mail.
4. Pay yourself a salary
While we’re on the topic of money going in and out of your business, you might be asking, “Can I take money out of my business account for personal use in any circumstances?” Yes, you can!
One way to keep business and personal finances separate is to pay yourself a salary from your company. OK, this might sound exactly like mixing finances—but stay with us.
Given you’re working on your business, it makes sense that you should earn a salary—it’s a legitimate part of owning a business. Do this by regularly moving money from your business account to your personal account, much like you’d expect when earning a salary from any company. Set this up as a bi-weekly or monthly payment, and then resist the urge to dip back into your business finances as personal costs arise.
5. Track your expenses and keep your receipts
Here’s some advice for business owners: being organized will always come back in your favor.
Running a business always has associated costs, whether it’s Shopify plan fees, the cost of materials, utility fees, or buying hardware for the office (that label maker isn’t free!). Whenever you make a purchase associated with your business, record this.
A few years ago, you would’ve needed to physically save all your paper receipts, and while this is still an option, you can also use apps to save receipts and track your expenses digitally. If you’re searching for how to keep track of business expenses, apps like Bench or QuickBooks can help. They integrate with your online stores and make it quick and easy to track expenses, keep receipts, and manage your bookkeeping.
You may have shared personal and business expenses. For example, if you run your business from home or use your personal vehicle for business-related purposes. In this case, be extra vigilant about recording these expenses. Using a mileage logbook for your car can be an excellent way to track how much gas you’re using for your business errands. And working out how much of your home’s floor space is taken up by your business will help you make deductions during tax season.
6. Get a business cash card
You’ve already got your business cash management account sorted, but one crucial thing to remember is to get a card associated with your account.
Having a card, whether a credit or debit card, further separates your business and personal finances and allows you to make every purchase related to your business with that card. Whether or not you receive a card with your account will depend on where you open your account. For example, if you open a Shopify Balance account, you’ll automatically receive a free virtual card, and you can also request a free physical card with your business’s name on it, should you need one.
If you have a business credit card, you can use that to pay your bills on time, which helps you build a strong business credit score. This could help you better qualify for a business loan if you ever want to scale your business. That said, there are services, like Shopify Capital, that do not require personal credit checks to apply for funding.
And, if you’re wondering, “Can I take money out of my business account for personal use?” That would be a hard no. You should only use this card for business expenses and instead use your salary from the business for personal use.
7. Do your taxes
If you’ve followed all the steps mentioned above, then they should nicely culminate in the final step of keeping business and personal finances separate—doing taxes.
As a business owner, you must complete a yearly business tax return and pay any taxes due (though if you owe more than $1,000 in taxes, you need to pay them quarterly).
You may need to complete your business tax return a month before individual returns are due, depending on your business structure. For example, if your company is a partnership, you need to complete your business return early to know how to fill out your individual return. Otherwise your taxes will be due on or around April 15 every year.
The takeaway
Although it might seem overwhelming to need to think about all of these details when you’re setting up your business, in the end you’ll thank your past self. By taking it step by step you can set up your business, establish good financial practices, and protect your personal finances and assets as well.
