BUSINESS CREDIT 101: Separation of Business and Personal Credit

KEEPING BUSINESS AND PERSONAL FINANCES SEPARATE IS CRITICAL

If there are blurry lines between your business and personal finances, you risk being held personally responsible for business debts. To best protect your personal assets, follow these steps:

1. File your business as an LLC or Corporation – this creates a legal situation called the “corporate veil” that protects your personal assets from business defaults. But if you do not keep your business and personal accounts separate, you can “pierce” your corporate veil and be held personally liable anyway. Make sure everyone you do business with knows you are an established business entity by putting LLC or Inc. on all your business materials. Paying someone to create and file the paperwork for an LLC or corporation can be quite expensive, but you definitely want some guidance here. You can file the paperwork yourself, just be sure to buy the document templates from a reputable source. You may find free forms on your state’s secretary of state or corporations website. (Just search “secretary of state corporations” for your state).

2. Request an EIN (Employer Identification Number) for tax purposes. These numbers are used for tax and reporting purposes and provide your business with a unique identity just like your personal social security number does for you.

3. Register your business with the business credit reporting companies. You can find information on how to do this on each company’s website.

4. Open a separate checking account for your business. NEVER pay personal expenses with your business account or business expenses with your personal account. You will blur the lines needed to maintain the corporate veil.

5. Open a business credit card. Bonus: you can deduct the interest fees off your business taxes.

6. Pay yourself a salary with a check from your business account and deposit it in your personal account. This creates a paper trail to establish separation of funds.

7. Be sure to keep up with all required formalities for your LLC or corporation. These may include annual meetings, establishing by-laws, and keeping corporate minutes. You can find more info about your responsibilities on your state’s secretary of state website.