Why You Should Separate Personal and Business Finances

We’re in a bustling era of business-building. Yelp’s recent Business Openings Report shows  637,590 new businesses opened across America in 2022, a 12 percent increase from 2019.

New business openings exceeded pre-pandemic levels in nearly every US state. There was a particular boom in home and local services business openings, alongside huge upticks in new hotel and travel businesses in metro regions. 

Are you among this batch of business builders? Then it’s important you avoid one of the most common mistakes new entrepreneurs make: keeping your personal and business finances together. Does one or more of these situations sound familiar? 

• You started your business as a short-term income-earner 
• You were unsure if it would take off at first, but you’re now seeing real sales growth
• You chose to manage business funds with personal accounts, because it felt simpler

These situations are understandable. Many businesses are opened almost by accident. And then they become successes through your intentional efforts, commitment, and drive. 

How separate finances makes your life easier

When the business starts to feel real — and grow — is around the same time you need to get serious about separating your personal and business finances. Above all, it will help you stay sane as you manage the complexities of your financial responsibilities at home, and at work. More specifically, it will help you ensure:

• You can pay yourself properly: It’s hard to know how much you can afford to pay yourself, if your sales income and business costs are muddled up with personal and family spending. It may become too tempting to pay yourself more when business is good. Or less when cashflow is irregular. Ideally, you should be paying your own salary into your personal account from a business-only banking account. 

• You can simplify tax time: Tracking your business income and expenses separately will make it easier when it comes to tax time. With separate finances, you won’t need to sift through all your personal finances to identify business income and expenses. It becomes easier to report, read, and file your tax documents too. And that frees you to focus on more important areas like product development, sales, and marketing.

• You can claim deductions: Claiming deductions is crucial for reducing your overall tax bill. It’s much harder to do that when your business costs are buried among personal banking transactions. If you sync your business bank account with some good accounting software, you can also automate much of the tedious bookkeeping work too.

• You can be ready to borrow: You need to prove your business can pay its bills and vendors on time if you want to secure outside in the future. It becomes much easier to gather this evidence — and build your credit score ‚ when you have a business bank account and good financial records showing your payables and receivables. 

• You can protect personal funds: Lastly, keeping your finances separate can also help you protect your household finances. Dipping into your personal savings for business costs can reduce your ability to pay for your mortgage, rent, health insurance, and utilities. 

By keeping your personal and business finances apart, you ultimately ensure you’re not borrowing from tomorrow, to pay for today.

3 simple steps for separating your finances

You can take some fairly simple steps to divide your business and personal finances into equally manageable areas. Here’s what we suggest. 

1. Get your business’s tax number

You don’t need to register your business as a limited liability company (LLC) to open a business bank account. In some states, you may need a registered trade name or a ‘Doing Business As’ (DBA) name. The Small Business Administration explains these terms and your options here. But you will need a federal tax identification number to open your business bank account. It's relatively easy to get one. Head over to the IRS to see how. 

2. Open your business bank account

Once you have these details, you can head to the bank, or fintech, of your choice. Aion provides business banking accounts that are federally insured up to $250,000 through Cross River Bank, multi-factor authentication, and account monitoring to protect your funds. We have no monthly bank account fees, or fees for automated clearing house (ACH) transfers or mobile check deposits. 

3. Set up bookkeeping and accounting

Organize your accounting system at the same time too. You have a couple of choices here. You can purchase some useful accounting software, like QuickBooks, and handle the books yourself. Or you can hire a bookkeeper and accountant to manage your tax affairs for you. We highly recommend you use some accounting software. 

Recent American University research shows 37 percent of small businesses and gig workers surveyed struggle with feelings of anxiety and confusion about taxes. A third of small businesses surveyed didn’t know whether they had to pay estimated taxes, while a quarter (25 percent) did not know how to file their taxes. 

This is why it’s a pretty good idea to get some outside help. You can connect one or more of your Aion banking accounts to QuickBooks to start automatically recording, so your business has no need to manually enter each transaction.

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Separating your personal and business finances may feel like extra work at first. But it will save you weeks and months of difficult admin down the track, if you do it early on. Dividing your finances ultimately gives you a clearer picture of both your personal and business financial health. And that’s a great foundation to build on.