What does keeping business and personal money separate actually mean?
It means every business dollar moves through accounts that hold nothing else, and every time money crosses to you, it's recorded as what it is. IRS Publication 583 puts it plainly: open a business checking account when you start, and keep it separate from your personal checking account. The same publication says to deposit all daily receipts in that account and to write checks to yourself only when you're taking money out for personal use.
The point isn't tidiness for its own sake. The IRS recordkeeping page says the responsibility to back up the entries, deductions and statements on your return is called the burden of proof, and it sits with you. When a grocery run and a supplier payment come off the same card, you have to sort them line by line before anyone can trust the totals.
Which situation are you in?
Here are five common setups, and each has a different first fix.
| Your situation | What to do first | How it shows in the books |
|---|---|---|
| Sole proprietor using one personal account | Open a business checking account | Every sale and cost in one place |
| Business account, but some costs on a personal card | Move recurring costs to one business card | Personal-card costs logged as owner contributions |
| Sole proprietor or default single-member LLC taking cash out | Transfer to yourself on a set day | Owner draws, not wages or expenses |
| Corporation, S corporation or LLC taxed as one | Pay yourself through payroll | Wages, with any loans papered separately |
| Months already mixed together | Reconcile and tag each transaction | Business items kept, personal items moved out |
You're a sole proprietor running everything through one personal account
Open a business checking account this month, and point every customer payment at it. Publication 583 says a sole proprietorship has no existence apart from you, and that you report its income and expenses on your personal return, which is why owners assume one account is fine. The tax return may be combined, but the record of the business still has to stand on its own. Say you mow lawns around Manchester and get paid by app transfer into the same account your mortgage comes out of. Moving that app's payouts to a business account is the single biggest step you can take.
You have a business account, but some costs still go on a personal card
Put the repeat costs, like software, phone and fuel, on one card used only for the business. For anything that still lands on a personal card, keep the receipt and record it in the books as money you put into the business. The IRS page on what kind of records to keep says supporting documents for expenses should show the payee, the amount, proof of payment, the date and what it was for. Mixed-use items need a split: Publication 583 says a vehicle used for both business and personal driving has its costs divided between the two, and miles are one way to do it.
You're a sole proprietor or single-member LLC and take money out when you need it
Pick a day, transfer a set amount from the business account to your personal one, and record it as an owner draw. That holds for a single-member LLC on its default tax treatment: the IRS page on single-member LLCs says one that doesn't elect to be treated as a corporation is a disregarded entity, reported on its owner's return. If your LLC elected S corporation or corporation treatment, the next section is the one for you. The Schedule C instructions say not to include amounts paid to yourself on the wages line. In bookkeeping terms, a draw is recorded in an equity account, not as an expense. A draw on a set day is far easier to follow than the business card being used at the pharmacy. If you're weighing whether your LLC needs a bookkeeper or an accountant for this, that question has its own answer.
You've set up a corporation, or your LLC is taxed as one
Pay yourself wages through payroll, and keep any other money you take out on paper. The IRS page on paying yourself says an officer of a corporation is generally an employee, and that wages paid to you as an officer should generally be in line with your duties. It also says a loan from the corporation to an officer should look like an arm's-length loan, with a contract, a stated interest rate, a repayment period and a consequence for not repaying. For a design studio in Portsmouth owned through an S corporation, that usually means a regular paycheck run through payroll, not transfers whenever the balance looks healthy.
Partnerships are different again. The same IRS page says partners aren't employees and shouldn't get a W-2 in place of a Schedule K-1, so money a partner takes out doesn't run through payroll as wages.
Your business and personal money are already mixed
Start from the bank statements, reconcile each month, and tag every line as business or personal. Publication 583 says to reconcile the checking account each month, and it suggests marking each deposit as business income, personal funds or a loan. That last part matters, because the same publication says your records can identify where receipts came from, and that you need that to tell business receipts apart from the rest. If a year or more is tangled, that's what catch-up bookkeeping is for, and there's more on what that involves in our catch-up guide.
Business and personal money tangled together?
Book a free consultation and we'll look at your accounts and tell you where to start.
Why does separation matter for a New Hampshire business?
Because in New Hampshire the same business figures can end up on a state return as well as the federal one. The Department of Revenue Administration's Business Profits Tax FAQ says proprietorships must include Schedules C, D, E, F, 4797 and 6252, where they apply, with their returns. So a Schedule C built from a mixed account isn't only a federal problem once a state return is due. Whether your business has to file at all is covered in our guide to New Hampshire small business taxes.
If you formed an LLC to keep business debts apart from your own, Publication 583 says LLC members aren't personally liable for its debts. Keeping the money apart is the bookkeeping side of that separation. If you own two LLCs, the same line runs between them, and this guide to bookkeeping for two or more LLCs explains why each one keeps its own bank account and books, and how to record money that moves from one to the other. What mixing it could mean legally is a question for an attorney, not a bookkeeper.
How do you set this up in your bookkeeping software?
Connect only the business accounts, set up equity accounts for money in and out, and close each month.
- Connect the business checking account and business card to your software, and nothing personal.
- Add an owner draws account and an owner contributions account under equity.
- Record every transfer to yourself as a draw, or as wages if you run payroll.
- Record business costs paid personally as contributions, with the receipt attached.
- Reconcile the business account against the bank statement every month.
If the file was never set up this way, QuickBooks setup and support can fix the structure, and monthly bookkeeping keeps it reconciled from then on. A café owner in Keene who gets the accounts split in January would want each month closed before the next one starts. If you'd like to talk it through first, get in touch. The first consultation is free.
