The CFO for Small BusinessKeeping business and personal money apart

What the IRS advises

The IRS tells owners to open a business checking account as one of the first things they do, and to keep it apart from their personal checking. It also advises reconciling the account each month. That's not paperwork for its own sake. It makes the business's money identifiable as the business's money.

What goes wrong when money mixes

Three things tend to happen. Deductions become hard to prove, because a charge on a mixed account could be either kind and the records don't say. Your own pay becomes invisible, since money leaves for personal use in small pieces that never get added up. And a lender sees a muddled picture. When a bank asks for statements and finds groceries next to inventory, it has to guess.

None of that means you did something wrong. It means the money is harder to read, for you and for everyone else.

Untangle one month

Paying yourself back

Sometimes you pay a business cost out of your own pocket. That's normal, and you can be reimbursed. If the business is a corporation, the cleanest way is a written arrangement called an accountable plan, where you submit the expense with its receipt and the business pays you back. Reimbursements made under such a plan aren't treated as wages when the IRS rules are met.

For other structures, the answer is simpler. Record the cost as a business expense and the repayment as a return of what you put in, each on its own line.

Contributions and draws on their own lines

Money you put into the business is a contribution. Money you take out is a draw, or a wage and a distribution if you're an S corporation owner. These belong in their own accounts, not in expense categories. When they land on the right lines, your profit is true and your pay is visible, which is what paying yourself with your taxes in mind depends on.

A one-month reset you can do yourself

Open the business account and the business card if you haven't. Pick a start date, the first of next month. From that day, pay only business costs from the business account, and only personal costs from the personal one. Move money between them in one clear way, either a draw or a reimbursement, and note the reason.

At the end of the month, look at the statement. Everything on it should be a business item. If something isn't, write down what it was. After one clean month, the second is easy.

What we do each month

When we close your books, we look at the lines where the two sides meet. We check that draws and contributions are on their own lines, that no personal charge sits in an expense, and that every reimbursement is recorded. The result is a profit figure you can trust and a pay record you can read. That is also what a lender looks at on the personal financial statement.

Both sides. This page's subject is the seam between your money and the company's. When it's clean, each side can be read without guessing about the other. If you're just starting, the first-steps page covers the basics.

Ask about reimbursing myself

Start the reset