How to Keep Personal & Business Wealth Separate

By Will Paustian, CFP®

Managing your personal finances can be challenging on its own, and when you add a business to the mix, things can get even more complicated. Keeping your personal and business finances separate is crucial for a variety of reasons, but it’s not always easy to do.

Why Keep Personal & Business Wealth Separate? 

As a new business owner, you may be tempted to dive right into building your company and overlook one of the very first steps of business management: as much as possible, do not commingle business and personal funds. Keeping your finances separate is crucial for several reasons, including:

Easier Bookkeeping & Tax Preparation

Keeping your personal and business finances separate can also make bookkeeping and tax preparation easier. By having separate bank accounts, accounting systems, and budgets, you can easily track your income and expenses and file your taxes correctly. This can save you time and money in the long run and it becomes especially important if you have multiple sources of income.

Better Financial Planning

Separating your personal and business finances can also help you plan for the future. By having a clear picture of your business finances, you can make informed decisions about investments, expenses, and other financial matters. This can help you grow your business and move toward your long-term financial goals.

How to Keep Your Finances Separate

Thankfully, keeping your business and personal finances separate is relatively straightforward and easy. Here are a couple steps you can take to get started today.

Choose the Right Business Structure

Choosing the right business structure is an important first step in keeping your personal and business finances separate. There are several types of business structures to choose from, including sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each structure has its own advantages and disadvantages, and it’s important to choose the one that best fits your unique business goals and financial situation. 

For example, an LLC provides liability protection while allowing for more flexibility in terms of taxation and management, while a corporation provides the most protection but also comes with more complex tax and legal requirements. Pass-through entities, such as partnerships and S corporations, allow business profits and losses to be passed through to the individual owner’s personal tax return, which can be advantageous for tax purposes but confusing when it comes to keeping business and personal wealth separate. Working with a financial professional can be a great step in understanding which structure makes the most sense for your business.

Open Separate Bank Accounts

Once you’ve decided on a business structure, you’ll want to open separate bank accounts for your business. This will make it easier to track your business expenses and income, and to file your taxes correctly. You can also apply for separate credit cards, debit cards, and payment processing accounts to avoid mixing personal and business transactions. This approach can help simplify the management of your finances and improve your financial reporting, especially during tax season.

Establish a Clear Accounting System

Maintaining a clear separation between your personal and business finances requires establishing an effective accounting system. One approach is to use accounting software, such as QuickBooks or Xero, to track your business expenses and income. This software can help you monitor cash flow, generate financial statements, and simplify tax preparation. It’s also important to keep receipts and invoices for all business transactions, and to accurately record every transaction in your accounting system. 

In addition to these measures, consider setting up a chart of accounts that categorizes your business expenses and income, so you can easily identify and report on different financial activities within your business. By implementing a well-organized accounting system, you’ll be better equipped to manage your business finances and avoid potential tax and legal issues down the road.

Consult a Financial Professional

Lastly, business owners should consult a financial professional before distributing funds from the company. Depending on the structure of the business and the amount and timing of the distribution, there can be significant tax implications. This is especially true if those funds are mistakenly commingled with your personal assets. A financial planner or tax professional can help you manage business distributions in a tax-efficient manner and avoid the potential hit to your personal finances.

We’re Here to Help

Are you struggling to manage your personal and business wealth and keep your finances separate? The JGP Wealth Management team has experience working with business owners and can help you organize and manage your finances so you can get back to running your company.  Reach out to me at wpaustian@jgpwealth.com or 503-446-6450 to get started today.

About Will

Will Paustian is a financial advisor at JGP Wealth Management, an independent, fee-based financial advisory firm in Portland, Oregon. Since joining the JGP family in 2020, Will has played an integral role in the firm by combining his knowledge of the financial world with a strong and dedicated work ethic in order to help our clients achieve their financial goals. Will is known for his commitment to walking our clients through everything they face in their financial lives, celebrating their victories along the way. He specializes in serving executives and entrepreneurs, specifically in the food and beverage industry and business owners planning to pursue an exit, tailoring his solutions to fit their unique financial challenges and opportunities.

Will graduated from the University of Oregon’s Robert D. Clark Honors College with a bachelor’s degree in finance and entrepreneurship, minoring in economics and is a CERTIFIED FINANCIAL PLANNER™ professional. He was awarded the Stamps Leadership Scholarship and served as a student trustee on the University Board of Trustees. He also spent time abroad in the UK studying behavioral economics at the University of Oxford. When not in the office with clients, Will enjoys a wide variety of activities, from hiking and fishing to cycling and traveling. He, along with his family, enjoys the sights and sounds of Oregon, cheering on the Oregon Ducks and the Portland Trailblazers and exploring the unique restaurants and businesses around the Portland area. To learn more about Will, connect with him on LinkedIn.