If you're running a business, it's a pretty smart move to keep your business and your personal finances separate. In fact, if you have a formal business set up, like an s-corp or LLC, you are required to by law. Keep it separate and don't commit fraud, kids.
The Importance of Keeping Your Business + Personal Separate
It's weird, but true: business entities are considered persons. They're separate entities. You are a separate entity from your business and vice versa. If you can move through the abstract weirdness of that, it's important to know why this matters.
One of the benefits of setting up a separate entity is the limited liability protection it offers. This is like a shield protecting you from being personally liable for something going wrong as a result of your product or service or at your place of business.
For example, let's say you make artisanal, organic, vegan gummy bears. And someone gets very sick as a result of your gummy bears. And they decide they want to sue you. They'll go after the assets of your business and not your personal account.
If you are involved in a law suit like this and you need to produce your bank statements and it's revealed that you haven't been treating your business like a separate entity, it can be argued that they are not separate entities. This is where you can get into big trouble.
In the boring business world this is called "piercing the corporate veil." When the veil is pierced, there is no longer the liability protection. Now you can be held personally responsible and the litigious party can make an attempt to go after your personal assets.
Scary stuff, right?
How To Keep It Separate
If you have entity, make sure you set up a business bank account. Please. I'm begging you. If you don't have one, stop reading, run out of your house and do it now.
You need to go to the bank with your stamped Articles of Organization or Articles of Incorporation, your tax ID and a check to deposit funds into your account.
Once it's set up, please use it. Make sure to deposit all your business income into the business account. Only pay for business expenses through your business account and if you need funds for personal expenses, pay yourself. Don't make personal purchases from your business account and vice versa.
What if You Don't Have a Formal Business Set Up Yet?
Even if you don't have a business set up yet and you're a freelancer or you're trying to get your business started, it might make sense to set up a separate account.
I prefer having a separate account because if you plan to grow your business, you'll need to do it anyway and it's good practice.
It makes it easier from a bookkeeping perspective. You know all the deposits coming in and expenses going out are business related. There's no guessing. It's clear.
How To Keep It Separate
All you have to do is open up another bank account. It doesn't need to be a business bank account. It can be a personal bank account, but you use it for business expenses only.
Any income that comes in from your business goes into that account. Any business expenses get paid for out of that account. Don't make any personal purchases out of your business account. If you need to, you can transfer the funds to your personal account. Yes, I realize it's silly kabuki, but I don't make the rules, guys.
If this is too big of a step for you to take, you can start with keeping a credit card that is strictly for business expenses. This is a good way to keep the expenses separate and minimize your bookkeeping. But, you still need monitor your freelance/business income.