How Can Small Business Owners Separate Business Accounts and Personal Accounts

March 7, 2024

An image of a small business owner meeting with their advisor to discuss both their personal and business accounts.

Every business starts as a sole proprietor or partnership before expanding to an office and corporation. When starting a business, you must learn administrative, financial, legal and taxation things on the go. One important thing every business owner should do from day 1 is separate personal and business accounts and finances. It can go a long way in saving you from legal and taxation troubles. 

Why Should Small Business Owners Separate Personal and Business Accounts? 

The work-life balance is good for personal and mental health, and the personal-business account balance is good for your financial health. At first, it may now look unnecessary to do double accounting. But business involves risk, and when things go south, you don’t want to sink with the ship but rather hop on to the lifeboat. That lifeboat is financial transparency on what is personal and what is business. 

If you maintain separate finances, you know how much your business earned and spent, helping you understand if the venture is profitable or burning cash. A separate business account makes you look professional when approaching investors, clients, and lenders, as they are interested in how your business finances.

Later, when your business has partners, employees, and more stakeholders, the financial transparency from Day 1 can help you protect your personal assets from business obligations and any legal issues. It can also bring tax efficiency as businesses enjoy lower tax rates and high tax deductions. 

How to Separate Personal and Business Accounts? 

The next question is how to get started. 

Get a Business Number

The first and foremost thing to do is register your business with the province where you will operate and get a federal business number and business tax account. A sole proprietor can also get a business number without incorporating the business. 

Open a Business Bank Account

Once you have a business number, you can open a business checking account and do all your business-related transactions from that account. You can collect your invoice payments in the business account, pay your employees, purchase inventory, pay bills, and pay any other business-related expenses from that account. Accumulating all business-related transactions in one account makes it easy to separate personal and business expenses in real-time. 

Maintain a discipline not to use your business account for your personal expenses. 

Get a Business Credit Card

You might have a good personal credit score, but does it make sense if you are using your personal credit card for all your business needs? What if you need a business loan in future? Since your business has no credit history, its credit score is also poor. 

From a long-term perspective, getting a business credit card can help you build a good business credit score over time. You can pay your office bills, incur all office-related expenses on the business credit card and pay the credit card bill. While this will clearly separate business and personal expenses, it will also lay the foundation for better financing options for business loans with lower interest rates.

Pay Yourself a Salary 

Even if you are the sole proprietor, make it a point to transfer money from your business account to your personal account as a salary to yourself. Just as the salary is credited bi-weekly or monthly, transfer a fixed amount from your business account to your personal account with a similar frequency. It will help you maintain spending discipline. Neither will you spend all your business money on personal use nor dry up your savings on business expenses, only to realize that you are cash-strapped. 

Organize Your Expense Records and Receipts

While maintaining separate bank accounts, file the receipts and invoices of business and personal expenses separately. You can use business accounting software to record and maintain business expenses. The software allows you to save a digital backup of the bills and receipts. 

At the end of the month, you can reconcile your business records and receipts with your business account statement to ensure no expense is left behind or wrongly categorized as personal. 

There may be shared business and personal expenses like vehicles, mortgage and electricity bills for the home office. In such a scenario, you should save the receipts and write a note detailing the business purpose. Suppose you used your vehicle to drive from home to work; it is a personal expense. But if you drove from work to a client meeting, that is a business expense. Note the mileage travelled for client meetings and any other detail you might want to include. 

At the end of the month, you can add up the business travel mileage and identify the percentage of the vehicle used for business. If you use 40% of the vehicle for business, you can deduct 40% of the fuel cost as business expenses. Similarly, if your home office takes up 25% of your apartment space, you can deduct 25% of rent, utility bills and other shared expenses as business expenses. 

Tax Filing 

The CRA allows sole proprietors to file their business and personal taxes together. While filing taxes, you can deduct business expenses from your taxable income. But to do that, you need all the receipts and records of your business expenses. If you follow the above steps, you can reduce your tax bill significantly. 

Keep Personal and Business Assets Under Separate Names 

While you have separate bank accounts, you should also have separate financial assets. If you buy a vehicle for yourself, buy it under your name and not under the name of the business. Your personal assets are protected if the business faces any financial or legal issues. Similarly, your business assets are protected from personal risk. 

All these steps might make you apprehensive, but developing a habit from the start will make you well-versed in the process. Later, when you incorporate, it will be compulsory to file business accounts separately, withdraw money from the business as salary and dividends, and segregate assets. Making mistakes at the start would be cheaper than making mistakes after your business grows. 

Contact KSSP Partners LLP in Markham to Help You with Your Accounting Needs 

A skilled accountant can help you prepare financial statements and guide you on business and personal transactions. To learn how KSSP Partners LLP can provide you with accounting and bookkeeping services, contact us online, or by telephone at 289-554-5997.