How to Separate Personal and Business Debt When You Own a Company

Owning your own company can be super rewarding, but it can also get complicated when it comes to managing your finances. One of the most important things you need to do as a business owner is keep your personal and business finances completely separate. This isn’t always easy, but it’s crucial for protecting your personal assets and credit score.

In this article, we’ll walk through some tips and strategies for keeping your business and personal debt totally separate. We’ll also look at some of the legal protections that separating your finances can provide. Let’s dive in!

Open Separate Bank Accounts

The first step is to open completely separate bank accounts for your personal and business finances. Having separate accounts creates a clear division between your personal and business transactions. Be sure to choose a bank that offers business checking accounts specifically designed for small businesses.

You should have at least two accounts – one personal checking account in your own name, and one business checking account in your company’s name. But you may also want to open a separate business savings account where you can stash away funds for emergencies, investments, or large purchases.

Get a Business Credit Card

After opening your business bank accounts, your next move should be getting a credit card just for your company. This ensures that all business expenses go onto the business card, while your personal spending stays on your personal cards. It also helps build up your business’s credit history.

Apply for a business credit card using your company’s information, including your Employer Identification Number (EIN). Make sure to use the card only for legitimate business expenses like supplies, software, travel, and marketing. Avoid mixing any personal spending on there.

Incorporate Your Business

Forming a legal business entity like an LLC or corporation creates crucial separation between your business and personal assets and debts. Without a formal entity, your business is considered a sole proprietorship or partnership by default – so you’re personally liable for all of its debts and legal issues.

But incorporating or forming an LLC legitimizes your business as a separate legal entity. This protects your personal assets like your house, car, or retirement accounts if your business runs into debt or gets sued. Talk to a business lawyer about whether LLC or incorporation better fits your needs.

Never Co-Mingle Funds

Now that you’ve got your separate business accounts set up, be disciplined about keeping funds completely separate. Never transfer money between personal and business accounts (in either direction). And don’t use personal funds or credit to financially support your business.

Likewise, don’t use business funds to pay for personal expenses like your mortgage, groceries, or vacations. Always pay yourself an official salary or owner’s draw from the business account – don’t just transfer funds over to your personal account.

Track Your Finances

Get in the habit of meticulously tracking your business income and expenses. Accounting software like QuickBooks makes this easy by linking to your business bank and credit card accounts. You can run reports on income, expenditures, account balances, and more.

Staying on top of your finances helps ensure that business transactions stay completely separate from personal. Review bank and credit card statements regularly to catch any improper mingling.

Consult Your Accountant

Enlist the help of a qualified accountant or bookkeeper, especially if finances aren’t your forte. They can advise you on the best practices for record keeping, categorizing expenses, paying taxes, and separating funds.

A knowledgeable accountant can also ensure that your financial records are fully prepared for tax time. This includes filing your personal and business tax returns completely separately.

Protect Yourself With Insurance

Another way to shield your personal assets from potential business liabilities is to get the right insurance policies. General liability insurance helps cover costs if your business gets sued, while errors & omissions (E&O) insurance protects against claims of negligence or failed duty.

Talk to an insurance agent about the types and amounts of business coverage you need for your unique risks. This gives you an added layer of protection between your business and personal finances.

Build Business Credit

Building up your business’s credit is key for separating from your personal credit profile. As your business pays its expenses and bills on time, it will accumulate positive payment history with vendors and lenders.

You can also open dedicated business lines of credit or loans to further establish your company’s credit. Then over time, your business can qualify for financing and large purchases in its own name, without relying on your personal credit.

Don’t Abuse Personal Credit

While it may be tempting to rely on personal credit cards or loans to finance your business, avoid doing this at all costs! It negates the protections of separation and puts your personal credit score at risk if the business can’t repay debts.

The whole point is to build your business’s credit so it can be financially independent from your personal credit profile. Take the time to build your business credit properly through diligent separation.

Consult an Attorney

Talk to a business attorney if you have questions about how to best structure your company and finances. An attorney can advise you on forming the right type of legal entity and help ensure your personal assets are shielded.

They can also review any business contracts you sign to look for clauses that could make you personally liable. Plus help you take the right legal precautions for maximum asset protection.

Make it Official

Finally, formalize your financial separation by putting it in writing. Draft a document detailing your commitment to maintaining separate personal and business accounts, credit cards, tax filings, and debts.

Sign it along with any other owners or shareholders and keep it with your official incorporation documents. This provides further evidence that you intend to operate your business as a completely separate entity.

Separating your personal and business finances takes diligence. But doing it properly from the very start provides immense protection and peace of mind as your company grows. Don’t cut corners – follow the steps above and consult professionals to keep your money matters completely separate. Here’s to your business’s success!