7 Why's for Separating Business and Personal Accounts

When starting a cleaning business, it's tempting to keep things simple by using personal bank accounts for business transactions. However, separating your business and personal accounts is more than just good practice—it’s essential for growth, financial clarity, and legal protection. In this blog post, we’ll explore the top seven reasons why creating distinct financial boundaries between your business and personal life can help you maintain professionalism, streamline finances, and protect your personal assets.

Reason #1: Beware the Tax Man

If you have a pass through entity, like a sole-proprietorship or a single-member LLC, your income goes in and you make the deductions, and you're taxed on whatever is left over. If ever audited, your local friendly neighborhood IRS agent won't care too much. Whether you put the money in a personal or business account, as long as the income is declared, it won't make a tax difference. 

However, you should still create separate accounts for business and personal. Come tax time it makes it much easier to do taxes with a business account free from personal transactions that you'd have to separate out. If the IRS (or whatever agency is auditing you) finds that you are putting income into a personal account, and you're claiming deductions out of that personal account, then your personal finances will face scrutiny too. It creates a messy situation that could have easily have been avoided.

If you're a corporation, like a S-Corp or C-Corp, or a multi-member LLC, you could be committing embezzlement under the eyes of the law. At a minimum, under the tax code, the IRS could disallow certain write-offs because your funds were commingled. 

Reason #2: You can Lose your Liability Protection

If you have an LLC or corporation, you're afforded a shield, of sorts, for personal liability protection. I give this example all the time:

Little Timmy finds a bottle of cleaning solution one of your workers left behind. Little Timmy sprays it in his eyes and he goes blind. The parents sue and win $2,000,000. Your insurance limit was only $1M. You're on the hook for the balance. Because you have a LLC setup, the liability stops at your business and you're protected from personal liability. Your business is on the hook and you could end up shutting down without the balance. But your personal finances remain intact and your assets like your home or personal cars are safe. 

Now let's flip the script some. Little Timmy sprays his eyes. He goes blind. Your business is on the hook for whatever your insurance didn't cover. But, you mixed personal funds with business funds. You used that business credit card to buy personal groceries, or you used your business account to pay for your personal car insurance.. You technically "pierced the corporate veil". You can now become liable personally for something your business did, even if you did have protections under a LLC or corporation.

Reason #3: It Makes Your Business Much More Sellable

If you're separating personal and business, you become more valuable in the eyes of future buyers. They're looking to buy you out, but they can't buy you out if you're depositing business funds into personal accounts or using business accounts to pay personal bills. They want to clearly see you are using any business account for business purposes. Having separate accounts makes it easier to match financial statements with business bank or credit accounts.

Reason #4: Separating Helps With Your Credit

Separating out business and personal will help in your credit. No, it doesn't really impact your scores. per se, unless you're overusing credit on the business side of things (eg a maxed out business credit card won't impact your personal credit). But it helps in so far that if you apply for credit, like a mortgage or an apartment, your lender (or landlord) would want to see proof of personal income, and if you are relying on business income, they'd want to see proof of that too. 

I bought my first home in 2010 and I just took over CleaningBiz#1. They looked at business bank accounts and personal ones alike, as well as personal and business financial statements, like my balance sheet and P&L. I kept financials separate except for one item: my rent. My landlord was the former owner of the company and he already had accounts set up to receive a personal salary. So when we took over I just kept paying him as my landlord through the system he created. This created the issue of the bank not seeing any payments to my landlord through my personal account. It came from the business account. Therefore in the eyes of my future mortgage lender, I personally wasn't paying rent...the business was. That created a whole mess that took a while to sort out with underwriting.

Back to Reason#1, we were later audited by the IRS and it was a field audit. They came out to the office and looked over everything. This came up as a topic. I had proof that I declared that rent payment as personal income and it was well documented. But I did receive a warning for making my rent payment that way and immediately had to fix that going forward.

Reason #5: Credit Accounts Can Cut You Off if You Commingle

Back in 2008 0r 2009, I enjoyed the perks of a new personal American Express card. Loved the rewards and it was a charge card which forced me to pay it off monthly, and certainly happy to do so. But those perks were something else. How can I charge up more on the card? My thought was to mix business with personal. Our supply budget at that time was about $5000/month for our commercial cleaning business. My supplier accepted AmEx. Well, why not use my AmEx to buy those supplies and earn more points? Sounded like a good idea, at the time. 

Well, AmEx does occasional financial reviews. They reviewed and learned I spent more money on the card than what I declared in income. They froze my card and wrote to me asking for an explanation, and I just happened to have received a bump in personal income at the time. I shared personal bank statements and they seemed satisfied but they warned me as they suspected I was using my personal credit card for business purchases. 

Picture this: I'm staying at the Sheraton in Greensboro, NC at the Koury Convention Center for a weekend. I'm there for a sold out conference. I'm paying a higher-than-usual rate. I enjoy the weekend and that early Sunday morning the hotel slipped a piece of paper under the door saying my AmEx was declined and I needed to talk to the hotel's manager. I go and talk with him and was treated like a criminal. I've stayed there over a dozen times with the most recent a few months before. But he warned me they'd call the police if the bill didn't get settled. So I call American Express. Sure enough, they froze it again, but this time there was no lifting it. AmEx closed it for good. I had to scramble to find the funds on other cards or cash to settle the bill. I got it taken care of but had I separated business from personal that wouldn't have happened.

Reason #6: Separate Accounts Help Cash Flow

If you keep separate accounts, you're apt to know exactly where you stand financially. This reduces your odds of misusing funds. Using a business credit card for both business and personal you'll get in a situation where you won't be able to get an accurate picture of your finances. That can cause you to overspend and could hurt your finances. 

Reason #7: Helps Establish a Business Image

You're working away, and winning new clients. To your delight, you win a new $8,000/mo client and it's your biggest yet! Congrats! But they have one rule: they only pay through ACH. Your new point of contact asks for a copy of your business checking or savings account for their system, but you don't have one. You've been running your business through a personal account, or worse, something like Zelle or Venmo. Could they reverse course because you don't have a business account? Definitely. For their accounting, they can't pay you personally. It has to be separate. Let's say they do give you a chance to remedy this. How would your future business image look to them?

What to do if you're mixing business and personal?

Stop. Set it right immediately. Get that all sorted out. Open a separate business checking and savings account with your local bank. Keep those transactions separated. Set up your DUNS number through Dun&Bradstreet. This Is like credit reporting for businesses and this will help in the long run. 

You're in business to make money. When you have business income, deposit it into your business account. Paying yourself is important, and if you ever read Profit First by Michalowicz, it's important to pay yourself first. Simply withdraw what you want to pay yourself and deposit it into your business account. You can make it electronic with bank to bank transfers or even withdraw cash out of the ATM from your business account and deposit every penny back into your personal account. This way you have a clear record of business income and personal income and you can equally prove both.

Next on Deck: Oh BOI, What's That? (coming 11-20-2024)