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If we could ask every new client to do one thing before we start, it would be this: open a bank account that is used only for the business, and stop running personal spending through it. It takes an afternoon. It is the single change that makes bookkeeping cheaper, taxes simpler and an LLC worth having.
What mixing costs you
Every personal transaction in a business account is a question. Was the grocery run supplies or dinner? Was the transfer to your personal account pay, a loan repayment, or a reimbursement for something you bought with your own card? Multiply by a month and the bookkeeping starts with sorting instead of recording, which is time you pay for.
At tax time the cost is sharper. Business expenses paid from a personal card get forgotten, and forgotten expenses are deductions you did not take. Personal expenses paid from the business account, if nobody catches them, become deductions you should not have taken, which is the kind of thing an audit looks for first.
And if you formed an LLC for protection, mixing money works against you. The protection depends on the business being separate from you; a shared account is evidence that it is not. Keeping the money apart is one of the simplest ways to keep the separation real.
Step one: the business account
Open a checking account in the business name. Banks will ask for the LLC paperwork and the EIN, or your registration and tax ID if you are a sole proprietor. Then move everything business-related into it: customer payments, the card on file with suppliers, software subscriptions, the account your payment processor deposits to.
From that day, the rule is simple. Business money comes into this account and business expenses go out of it, and nothing else does.
Step two: pay yourself on purpose
Owners mix accounts because they need money to live on, and taking it in dribs is easier than deciding. Decide instead. Once or twice a month, transfer a set amount from the business account to your personal account, and label it. For a sole proprietor or a default LLC that transfer is an owner draw; it is not an expense of the business, and it is not taxed on its own because the profit already was. For an S corporation the owner's pay runs through payroll as salary, with distributions on top.
The habit does two things. Your personal spending now happens from personal money, so it never touches the books. And the draw line in your reports shows you honestly what the business can afford to pay you.
Step three: one card for the business
A business credit or debit card, used for nothing else, makes every receipt a business receipt. Keep the physical receipts, as photos on your phone or in a folder, because the card statement proves you paid, and the receipt proves what for.
Step four: the months already mixed
Separating accounts today does not fix last year. If the past months are tangled, they get sorted once, as a catch-up bookkeeping job, by going through the statements and tagging each transaction as business, personal, or draw. It is tedious work, which is exactly why it is worth paying someone to do once rather than living with it.
Step five: keep the habit
Ten minutes a week. Look at the business account, confirm that every line is business, and move any personal slip to your own account with a note. With the accounts clean, the bank feed into QuickBooks becomes the bookkeeping, the monthly questions shrink to a handful, and the report at the end of the month is one you can trust.
That is also why the first item on our financial health checklist is a separate account, and why monthly bookkeeping with Choice begins by asking whether you have one. If you do not yet, start there, this week, and the rest gets easier.
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Questions about this topic
Do I need an LLC before I can open a business bank account?
No. Sole proprietors can open business accounts with their registration and tax ID. If you form an LLC later, you open an account in the LLC's name and move the activity over.
Is an owner draw an expense?
No. It reduces the cash and the owner's equity in the business, but it is not a cost of running the business and it does not reduce the profit that is taxed.
What if I already paid business expenses from my personal card this year?
List them with receipts. They can be recorded as expenses paid by the owner and either reimbursed from the business account or treated as money you put into the business.
Written by the team at Choice Business Advisors, a bookkeeping, tax, and advisory firm based in Utah serving small businesses across the United States in English and Spanish.