For many owners, the business starts as a side project paid for from a personal account. As it grows, personal and business transactions get mixed together. Separating them is one of the simplest changes that improves bookkeeping, tax records and peace of mind.

Why it matters

The IRS expects business income and expenses to be supported by records; its recordkeeping guidance explains why. When personal and business spending share one account, every transaction has to be sorted, and expenses are harder to support. The SBA's guide to managing your finances also notes that you will need a business bank account to accept payments.

For owners of an LLC or corporation, keeping finances separate also supports the legal separation between you and the business. Speak to an attorney about what that means in your situation.

Step 1: Open dedicated accounts

Open a business checking account and use a business credit card for business costs only. Many businesses use an Employer Identification Number to open accounts; the IRS explains that you can get an EIN free, directly from the IRS.

Step 2: Route all business income there

Point payment processors, marketplaces and client payments to the business account. Avoid depositing business income to personal accounts, even occasionally.

Step 3: Pay yourself deliberately

Move money to yourself on a schedule. How you pay yourself depends on your business structure: sole proprietors and partners usually take draws, while owners of corporations are often paid wages through payroll. The IRS overview of business structures explains the differences. Record transfers to yourself as draws or wages, not as business expenses.

Step 4: Handle the occasional mix-up

Mistakes happen. If you pay a business bill personally, record it as an owner contribution with the receipt attached. If you buy something personal with the business card, record it as a draw and avoid letting it become a habit.

Step 5: Shared costs

Some costs, such as a phone or a home office, are partly business and partly personal. Keep a record of the business share and how you worked it out. The IRS explains the rules for a home office on its home office deduction page.

Fixing past mixing

If you have months of mixed transactions, go through the personal account statements and pick out the business items with receipts, and go through the business account and mark personal items as draws. It is tedious once, but your books become reliable from then on.

Key terms

  • Owner contribution: money or property the owner puts into the business. It increases equity and is not income.
  • Owner draw: money the owner takes out of an unincorporated business. It reduces equity and is not an expense.
  • Distribution: a payment of profit to the owners of a corporation or LLC, recorded in equity.
  • Reimbursement: repaying an owner or employee for a business cost they paid personally, supported by a receipt.
  • Mixed-use cost: a cost that is partly business and partly personal, such as a phone. Record how the business share was worked out.

Keeping these categories separate in your chart of accounts is what makes the separation visible in your reports.

How we help

Our bookkeeping services include setting up accounts properly and sorting past transactions. See also what business records to keep.