Separating business and personal finances for the self-employed

by Shay Steacy

As the sole owner of your business, it’s sometimes hard to see the line that divides personal expenses from expenses you incur to earn income from your business. As a sole-proprietor, you and your business are one and the same, so expenses technically come from the same pot. However, there are some serious advantages to separating personal costs from business costs.

The business account conundrum

The first thing I want to clear up is the question of whether or not you need a business bank account. What I’m talking about here is a bank account specifically in the name of your business.

If you want to issue invoices and accept payments in any name other than your personal name, you’ll need to open a business bank account. This includes traditional banking methods like depositing and issuing cheques, but also includes the bevy of online or electronic payment methods.

Business bank accounts are usually more expensive than personal accounts, but if you want your bank account name to be that of the business, you’re stuck. Just be sure to shop around to make sure you’re getting the best one for your needs—both in terms of fees, and any tools they provide to help you manage your business. For instance, some banks offer accounts focused on mainly electronic transactions, which may be more cost efficient if you don’t plan on depositing cash or cheques.

So what if you can conduct all business in your name alone? Do you need to go through the process of setting up an additional bank account? My recommendation is yes…

The “why” of keeping business and personal separate

The biggest reason is that it makes it so much easier to isolate expenses that relate to the business and were incurred for the purpose of making an income. According to the 2018 National Small Business Association Taxation Survey, 1 in 3 American small businesses spend over 40 hours each year preparing their federal taxes. These businesses are also 6-8 times more likely to get audited…. Ain’t nobody got time for that!

Business expenses are deductible, meaning they reduce the amount of income that you will pay tax on. So you’ll want to claim as many valid business expenses as possible, and this is much easier to do if you can see all the expenses in one account.

This not only applies to bank accounts, but to credit cards as well. Like with bank accounts, you can get different benefits from different cards, so make sure you shop around for a credit card that helps you maximize value for your business. Therefore, one credit card and one bank account will pay business expenses (e.g. office overhead, insurance, inventory, etc.), and one credit card and bank account will pay personal expenses (e.g. groceries, child care, a bottle of wine for those long weeks…).

Better saving than sorry

There is another bank account that I would recommend setting up, and that’s a “taxes” account. From every dollar you earn, you should be putting aside money into a bank account that will be used to pay your income tax. There are different ways to calculate this amount, and it will vary person to person, but a good starting point is 20%. (If you are collecting HST on your sales, you should also have a bank account for the HST amount. This isn’t your money—you can’t spend it! Set it aside in a separate account for tax time).

To sum it up…

As you can see, there are many practical reasons to separate your business from personal spending. Ultimately, you should have a business account, a business credit card, a savings account for paying taxes, plus whatever personal accounts you need. It may sound overwhelming, but the Financial Planner in me would be remiss if I didn’t mention that, in the longer term, it will help you see the profitability of your business and understand how your business can help you meet your financial goals.

There are many traditional banks as well as online options available for bank accounts, so hop on over to Google and get searching…. What are you waiting for?

Shay Steacy, CFP

Shay Steacy, CFP is the Lead Financial Planner & Principal at KindWealth. With 13 years of experience as an advisor at two of Canada’s top banks, Steacy is passionate about helping people make sense of the complicated financial world. Follow along with her journey as a digital nomad in South East Asia.

Header image created using Creative Common assets from Pablo Stanley.