How to Separate Your Business and Personal Credit

Owning a small business comes with a lot of risk and unknowns. And while we all aspire to succeed, sometimes things don’t work out the way we plan, which is why, when starting a business, one of the first steps you should take is ensuring you have protection against your personal finances in the off chance that your business doesn’t succeed. 

By separating your personal and business finances, you’re not only safeguarding your personal assets, but also setting your business up for success when it comes to applying for additional loans and lines of credit in the future. Whatsmore, keeping business and personal finances separate ensures you don’t max out or damage your personal credit if your business faces financial mishaps – and vice versa. 

So how can you protect your personal finances while building up your business’ credit and financial standing? Read on to find out what to consider, and three steps you can take to separate the two.

Why You Should Keep Your Business and Personal Credit Separate

To understand why it’s so important to separate your business from personal credit, it’s a good idea to first understand the difference between the two. Personal credit is directly tied to your social security number, and weighs factors like your debt-to-income ratio, personal spending history, and repayment history. Business credit, on the other hand, is completely separate, and directly tied to your business’s EIN number. This means your business credit only weighs factors related to your business’s financial history, and nothing from your personal.

By separating the two, you put yourself in a position to avoid legal implications, since there are now ways to separate your personal assets from that of the business, along with avoiding additional bookkeeping and tax headaches, since you’ll be filling both separately.   

Three Ways to Separate Your Business and Personal Credit 

Step 1: Establish Your Business as a Separate Financial Entity

The first step in separating your business finances from your personal is to do just that – separate them – which starts by establishing an LLC, S-Corp, or Sole Proprietorship. Each has its own unique benefits depending on your business’ type and sector, but essentially all fall under the category of establishing your business as a separate entity from your personal finances. 

By doing this, you’re limiting your own personal liability for business debts and taxes, while adding a layer of protection against your personal financial assets – such as investments, retirement savings, and even your home – in the case of your business going bankrupt. 

Step 2 – Build Up Business Credit

Just like personal credit, business credit takes time to establish and grow. However, once you’ve established a line of credit for your business, it will be easier to secure business loans (with better rates!), while opening up better opportunities for taking on additional capital as your business grows.

To begin establishing your business’ credit, opening a small-business credit card could be a good option to get your business off the ground – especially if you can secure a low interest rate, and, even better, receive rewards points to invest back into your business. By using a business credit card responsibly – meaning you only use it for business expenses, and pay off the balance each month – you help build up a strong financial reputation as your businesses’ credit gets established. 

Want to fund a business but have bad credit? Read this to learn your options. 

Step 3 – Pay Yourself a Salary

When you’re running a business, it may seem like, at times, your money and that of the business are one in the same. However, failing to pay yourself a salary can have serious financial consequences, including tax implications.

By paying yourself a salary from your business, you’re helping to create a formal boundary between your business finances and your personal finances. You can easily do this by setting up automated payroll and transferring money from your business’ bank account to a personal checking account once or twice per month (just like payroll you’d receive if you were working for an employer).  

The bottom line: with options available for building up your business credit and securing funding, there’s no reason to put your personal assets and credit history at the risk of running your business. By keeping the two separate, you’ll be setting up your own finances, and the financial future of your business, for success.   

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, we advise you to consult with a licensed advisor.