How To Separate Business and Personal Expenses in 2025

We’re going to let you in on a secret: Figuring out how to separate business and personal expenses is something that will save you from a massive headache down the line.

While it might seem easy to combine your business expenses with your personal ones when starting a business, doing this can leave you and your business exposed to challenges in the future, especially during tax season and concerning asset protection.

To put it bluntly, it’s a shortcut that will quickly turn into a battle.

Don’t worry: Setting up your business finances isn’t as hard as it seems. To help you figure out the best course of action and avoid costly mistakes, we’ve rounded up a list of things you can do to separate business and personal expenses. Let’s dive in.

Why separate business and personal expenses?

Keeping your business and personal finances separate is crucial for reasons beyond simple organization. It’s vital to ensure accurate accounting, maintain clear records of business purchases, and protect your personal assets from potential legal or financial issues that may arise from the business. 

This separation provides a more organized financial picture, making it significantly easier to track spending, file taxes accurately, and apply for loans or other financing when your business is ready to grow. By drawing a clear line between business and personal funds, you can more easily identify areas of inefficiency or financial mismanagement within your company.

How to separate business and personal expenses

1. Get your employer identification number (EIN)
2. Choose and register your business structure
3. Open a dedicated business bank account
4. Get a business credit card or debit card
5. Pay yourself consistently (salary or owner’s draw)
6. Track all business income and expenses
7. Maintain clear records and do your taxes

1. Get your employer identification number (EIN)

The first step when working out how to separate your business and personal expenses is to protect yourself and establish your business as a distinct entity by getting an employer identification number, or EIN. This nine-digit number is assigned by the IRS and allows them to identify your business for tax purposes.

You can use your EIN for many important business activities, including establishing your business type, applying for business bank or cash management accounts and credit cards, and filing your business tax returns, all of which are covered later in this guide.

Getting an EIN is mandatory for many business types, such as partnerships or any business with employees. However, it’s not compulsory if you are a sole proprietor. That said, getting an EIN is still highly recommended even if you’re a sole proprietor. Without an EIN, you’ll need to use your Social Security number (SSN) for all your business purposes. Using an EIN helps keep your SSN private, which is crucial for protecting your personal identity. An EIN also makes the process smoother for business banking and loan applications, as many financial institutions require one. And, if you plan to change your business structure later on—for example, hiring employees—you’ll already have the necessary EIN.

Applying for an EIN is a free service done online via the IRS website. It’s a straightforward application, and you will receive your EIN immediately upon completion.

2. Choose and register your business structure

The next step in learning how to separate business and personal expenses is formally registering your business and choosing the right type of legal structure. Different business structures offer varying levels of legal and financial protection that are key to keeping your personal finances safe from business liabilities. Understanding these differences will help you make an informed decision.

Sole proprietorship

Sole proprietorship is a standard business structure, particularly among small business owners and freelancers. It’s the simplest and least expensive structure to set up, as it often requires little more than registering your business name with your local or state government.

A significant disadvantage of registering as a sole proprietor is that you, as the owner, do not have any legal separation or government protection between your personal and business assets. You are solely responsible for any liabilities the business encounters, including debt, profit losses, and legal challenges. This means your personal assets, such as your home, savings, and car, are at risk if your business faces financial difficulties or lawsuits.

Limited liability company (LLC)

An LLC is another popular business structure for small businesses because it offers a balance of simplicity and protection. The application process is generally not overly complicated, and the fees are minimal compared to corporations. You can set up an LLC as a single-member (sole proprietor) or multi-member (partnership) entity.

An LLC helps separate business and personal expenses because it provides you, the owner, with a crucial layer of personal liability protection. This means you generally cannot be held personally liable for your business debts or legal problems. For example, if someone sues your business, you typically will not be forced to give up personal assets such as your car, home, or savings to cover this debt.

However, it’s critically important to note that you can lose the protection an LLC offers if you fail to treat the business as a separate legal entity. This is often referred to as “piercing the corporate veil.”

Understanding piercing the corporate veil

Piercing the corporate veil is a legal concept where a court can disregard the limited liability protection offered by a business structure like an LLC or corporation. This happens when the business owner fails to maintain a clear separation between the business and their personal affairs. If the veil is pierced, the owner can be held personally responsible for the business’s debts and liabilities.

Mixing business and personal expenses is one of the most common ways business owners risk piercing the corporate veil. This is why maintaining distinct finances is not just good practice, but essential legal protection.

Corporations

A C corporation is a more complex business structure where the business is taxed separately from its owners, who are called shareholders. While many large brands are C corporations, small and medium-sized businesses can also choose this structure, particularly if they plan to seek outside investment.

Much like an LLC, running a C corporation means you have limited liability for the owners, which protects your personal assets in the event of business debt, loss, or legal claims. However, corporations have more stringent record-keeping and reporting requirements compared to LLCs and sole proprietorships.

3. Open a dedicated business bank account

If you’ve been wondering how to separate business and personal expenses, the most significant and practical step you can take is to set up a dedicated business bank account. This should be done as early in your business journey as possible to establish good financial habits and clear record-keeping from the start.

A business account allows you to collect all your business income and make all your business-related payments from a single place. This includes paying bills, buying materials and equipment, covering operating expenses, and depositing revenue from sales.

If you’re running your business through Shopify, you can open a free Shopify Balance account. This allows you to manage your store and business finances from the same place, with no monthly fees. Setting up a Balance account takes minutes and can be done online. You’ll receive a virtual card instantly, so you can start making business purchases right away. You can also request a free physical card with your business’s name on it.

Using a separate business bank account provides a clear and easy-to-follow record of all your business’s financial activity, which is invaluable for bookkeeping, financial analysis, and tax preparation. It instantly creates a barrier between your personal funds and your business revenue.

Business checking vs. savings accounts

While a business checking account is essential for daily transactions, consider opening a business savings account as well. A savings account can be used to set aside funds for specific business purposes, such as paying quarterly estimated taxes, building an emergency fund for unexpected expenses, or saving for future investments in your business. 

Keeping these funds separate from your operating cash in a checking account helps with financial planning and ensures money is available when needed.

4. Get a business credit card or debit card

Once you have your business bank account set up, getting a card associated with that account is a crucial next step. This could be a business debit card linked directly to your checking account or a dedicated business credit card.

Having a business card further separates your business and personal finances by ensuring all business purchases are made using business funds. Whether you receive a debit card automatically depends on where you open your account.

Using a business credit card specifically can also help you build a strong business credit score. This is separate from your personal credit score and is important for your business’s financial health and future growth.

Building business credit

Building a positive business credit history makes it easier for your company to qualify for loans, lines of credit, and favorable terms from suppliers down the line. Lenders and vendors look at your business creditworthiness when making decisions. Using a business credit card responsibly (paying bills on time and keeping balances low) is one of the primary ways to establish and improve your business credit profile. 

It’s essential to use your business card only for legitimate business expenses. Do not use this card for personal purchases; use your salary or owner’s draw from the business for personal needs.

5. Pay yourself consistently (salary or owner’s draw)

While we’re on the topic of money going in and out of your business, you might be asking, “Can I take money out of my business account for personal use in any circumstances?” Yes, you can, but it needs to be done correctly.

One of the most effective ways to keep business and personal finances separate is to pay yourself in a structured, consistent manner from your business account to your personal account. This might be through a regular salary (common for corporations) or an owner’s draw (common for sole proprietorships and LLCs).

Given you’re working on your business, it makes sense that you should earn compensation—it’s a legitimate business expense. Set up a regular payment schedule, whether it’s bi-weekly or monthly, to transfer funds from your business account to your personal account. 

Once the money is in your personal account, you can use it for personal expenses. The key is to resist the urge to dip back into your business finances for personal costs between these scheduled payments. Treating your compensation as a formal transaction reinforces the separation between your business and personal finances.

6. Track all business income and expenses

Here’s some advice for business owners: being organized with your finances will always come back in your favor. Tracking every dollar that comes into and goes out of your business is fundamental to separating finances, understanding your profitability, and preparing accurately for taxes.

Running a business always has associated costs, like the cost of materials, utility fees, advertising expenses, or hardware for the office. Whenever you receive income or make a purchase associated with your business, record this transaction and keep supporting documentation like receipts or invoices.

Choosing the right accounting method

Businesses typically use one of two accounting methods: cash or accrual. The cash method records income when cash is received and expenses when cash is paid out. The accrual method records income when it’s earned and expenses when they’re incurred, regardless of when cash changes hands. 

Understanding the difference is important as it impacts how you track income and expenses. Most small businesses use the cash method, but larger or more complex businesses may use accrual.

Using accounting software and apps

Gone are the days when you needed to physically save all your paper receipts in a shoebox. While keeping physical copies is still an option, using accounting software or apps makes tracking expenses and managing your bookkeeping significantly easier.

Apps like Bench or QuickBooks can help. Many integrate with your online stores and business bank accounts, making it quick and easy to record and categorize income and expenses, capture digital receipts, and generate financial reports. Using dedicated accounting software ensures that only business-related transactions are being tracked, providing a clear picture of your business’s financial health.

Tracking mixed-use expenses (home office, vehicle)

Some expenses can be legitimately part business and part personal, such as using a home office, your personal vehicle for business errands, or your personal phone for business calls. In these cases, be extra vigilant about accurately tracking the business portion of the expense.

• For a home office, you can potentially deduct a portion of your rent or mortgage, utilities, and other home expenses based on the percentage of your home used exclusively for business. 
• For your vehicle, keeping a detailed mileage logbook is essential to track business-related trips and calculate deductible vehicle expenses.
• For a phone or internet bill, you can typically deduct the percentage of time or usage dedicated to business activities. 

Maintaining thorough records is crucial for claiming these deductions accurately during tax season.

7. Maintain clear records and do your taxes

If you’ve followed all the steps mentioned above, then they should nicely culminate in the final, and arguably most critical, step of keeping business and personal finances separate: accurately filing your taxes.

As a business owner, you have specific tax obligations beyond those of an individual. You must complete a yearly business tax return and pay any taxes due. If you expect to owe $1,000 or more in taxes for the year, you will likely need to pay estimated taxes quarterly.

Key tax obligations for small businesses

Your specific tax filing requirements and deadlines depend heavily on your chosen business structure. For the 2024 tax year (filed in 2025), partnership and S corp returns (Form 1065 and Form 1120-S) are typically due by March 15, 2025. C -corp returns (Form 1120) and individual returns (including Schedule C for sole proprietors) are generally due by April 15, 2025. 

These dates can shift if they fall on a weekend or holiday, and extensions are often available. Accurate record-keeping throughout the year makes preparing for these filings much simpler. You can explore common business tax deductions to understand what expenses you can claim.

When to hire a tax professional or accountant

While it’s possible to manage your business taxes yourself, especially for simple structures like sole proprietorships, many business owners benefit significantly from hiring a tax professional or accountant. An expert can help you understand complex tax laws, identify all eligible deductions and credits, ensure accurate filing based on your business structure, and provide guidance on estimated taxes. This can save you time, reduce your tax liability, and help you avoid costly errors or audits.