Separating Your Business and Personal Finances (And Why It Matters To Small Business Owners in Louisiana)

A QuickBooks survey found that 85% of Black small business owners covered company expenses using personal funds in 2024. Dipping into your personal funds for your company expenses? It happens. When you run a business, it can feel like everything is mixed in a never-ending mash-up of work and life. But if intermingling your personal and business finances becomes a constant pattern, you’re setting yourself up for even more stress as time goes on. You might even be “piercing the corporate veil,” which, if you’re operating as a limited liability company (LLC), can strip you of your limited liability protection.

On the other hand, clearly separating business and personal finances helps to protect your personal assets, while building the foundations that encourage business growth. For example, building up your company’s credit score specifically can increase your chances of securing funding across grants, loans, and financing. That means you don’t have to self-fund opportunities for business expansion and growth.

Perhaps best of all, separating business and personal finances is upstream from greater stability, peace of mind, and, unlike so many other areas of business… it’s actually something you can control. (No, seriously!) Here’s what to expect:

Why Is It Important for Small Business Owners in Louisiana To Separate Their Personal and Business Finances?

It might not be top of your list when you first start your small business — completely understandable; you have a never-ending to-do list and so much to learn! But the sooner you separate your personal and business finances, the sooner you can get ahead on:

• Legally protecting personal assets. The structure you choose for your business determines whether you, as an individual, are legally classed as a separate entity from your company. Why does this matter? This legal separation comes with a level of financial protection. Your personal assets (if you own a home or have savings, for example) are kept separate from your business liabilities, and so are generally protected.
• Cash flow management. This is your path to knowing exactly what is happening with your business’s finances. It gives you a clear picture of your company’s true cash flow, expenses, and profitability. And there is so much that comes downstream from this…
• Planning for your taxes. Only 48% of small business owners feel confident that they’re paying their taxes correctly. If you’re in the other 52% (no judgment here), the quickest way to feel tax ready is to plan as you go… this is especially relevant to small business owners in Louisiana, given that it has the highest combined sales tax. Planning makes it easier to keep tabs on legitimate business expenses, maximize write-offs, and calculate accurate net income. On the other hand, mixing personal and business funds can muddy the waters, making it harder to distinguish between your finances, while opening you up to penalties should the Internal Revenue Service (IRS) audit you.
• Creating an accurate business budget. Having your personal and business incomings and outgoings all in one place will paint an inaccurate picture of what’s truly going on with your business finances. And you can’t build an accurate business budget based on inaccurate figures.
• Saving money in your business. The knock-on effect of better cash flow management, tax planning, and working from an accurate business budget is saving money in your small business. These savings can come from having a clearer picture of what running costs you can reduce, or planning for more efficient tax payments.
• Building a household emergency fund. Building your household emergency fund will help you avoid dipping into business savings or profits should a personal emergency arise. You need a clear picture of both your household and business finances to build your household emergency fund, and that comes from keeping your finances separated.
• Improving your credit score. Separating your personal and business finances will help you put together a stronger debt management plan if you accrue debt, or better yet, help you avoid debt in the first place. Debt management matters because late payments can negatively impact your credit score. On top of that, setting up your business as a separate legal entity will help your company build its own financial history. As a general rule, that means your personal credit score won’t negatively impact your ability to source the external funding needed to grow your business.

How To Separate Your Business and Personal Finances in 5 Steps

You want legal protection between your business and personal assets; maybe you just want to make the process of filing your taxes easier; you might even want a pathway towards attracting investment for future business growth… this five-step process can help you separate your business and personal finances so you don’t just survive, but have the potential to thrive.

1Start With the Correct Legal Business Structure

A limited liability company and a sole proprietorship are two of the most relevant structures for small business owners in Louisiana. But what’s the difference?

Because it’s seen as easier to set yourself up as a sole proprietor, it’s pretty common for folks to start there and then register as an LLC down the line. If you’re a Louisiana-based sole proprietor and want to switch up your business structure, you typically do this by forming a new LLC and transferring your existing business assets and operations into it.

If you’re reading this, you’re likely the sole owner of your business. So if you set yourself up as a limited liability company, you would operate as a single-member LLC. You can also structure your business to have more than one owner; that would make your company a multi-member LLC. Should a multi-member LLC make more sense for you, get very clear about pay structure in your operating agreement (more on this later)…

A corporation (or C corp) is another business structure worth keeping in mind if you plan to raise venture capital in the future. However, overall an LLC is likely better for you as a small business owner or independent contractor. It’s a simpler structure than a C corp, and you’ll benefit from flexible operations and avoid corporate-level taxation.

2Open Separate Bank Accounts

If you’ve set up as an LLC, you need to have a separate business account to keep legal liability protection and comply with IRS tax rules. Sole proprietorships in Louisiana are not legally required to have a dedicated business account. However, most traditional banks will close your personal account if they realize you’re depositing checks that are made out to your business. Legalities aside, opening a dedicated bank account for your company is a simple way to keep business and personal finances separate.

When it comes to your business, you’ll want to set up a checking account as a minimum. Remember to route all of your client payments and business income directly to this account. We’ll cover more on this later, but you should also use this account to cover business expenses as needed. A dedicated business savings account isn’t a must-have; still, it’s generally a good idea. You can use this account to set aside money for quarterly tax payments and to start building a business emergency fund.

3Get a Business Debit and Credit Card

According to QuickBooks research, 70% of small businesses admitted to using personal credit cards for business expenses. It’s legal in Louisiana to use your personal cards to cover business expenses, but it’s not recommended. By intermingling funds in this way, especially as an LLC, you risk losing liability protection, which leaves your personal assets vulnerable.

Relying on a personal credit card for your company also means you’re not building your business’s financial history and, therefore, a credit score that’s separate from you as an individual. Then, from a mindset point of view, by getting into the bad habit of using your personal credit card for business, you can end up being more lax with your spending than you would be if you committed to spending only company profit you actually have.

Whether you’re an LLC or a sole proprietor, a separate business debit card will make it much easier for you to review and track your business expenses. There are many benefits downstream of that, one of the top ones being tax preparation. For example, a separate business debit card will make it simpler for you to track, record, and claim tax-deductible expenses.

It’s ‘safer’ to get a debit card because you’re spending money you actually have. However, taking a measured approach to using a business credit card can help you build up your company’s financial history and credit score. And that can help you attract external investment for future business growth.

When you’re applying for a business debit or credit card, remember to do so in your business’s name. You should also limit card usage to business purchases only. Don’t use either to cover your personal expenses.

When it comes to your credit card, always pay your bills on time, and if you can, clear your balance as soon as possible. Missing a payment can harm your credit score. If you’re among the 24% of small businesses that “don’t believe they will be able to clear their credit balances without paying interest,” work on a debt management strategy for your business.

4Use a Formalized Pay Structure

It can feel quicker to dip into your business account for funds as and when needed, or more realistically, transfer payments into your personal account as and when the cash rolls in… Let’s face it, there’s always something to do, and often paying yourself is the last on the list. However, setting up a formalized pay structure means that you’ll be less tempted to cover random personal expenses via your business account. Beyond that, it will help you stick to a business budget!

As a small business owner in Louisiana, you can set up an automated interim distribution — a predetermined or periodic transfer from your business checking account to your personal one. Whatever framework you follow, fixed or variable, you can legally change the amount whenever you want.

There are some specific requirements for taking interim distributions legally as a single-member LLC in Louisiana. You can’t withdraw a distribution if your business couldn’t pay its regular bills as they come due as a result, or if it means your LLC’s total liabilities would exceed its total assets.

Remember in step one we noted the difference between a single-member and a multi-member LLC? Here’s why… It gets a little more complicated for multi-member LLCs to draw down interim distributions. For a start, there’s less flexibility, with much more resting on the specifics of your operating agreement that you collectively draw up. That’s why it’s important to get into these specifics when drawing up the document.

Once you’ve settled on your payment structure, including the frequency and amount of the withdrawals, you’ll want to track them. Clearly categorize these transfers to your personal account as “Interim Distributions,” and log the date and amount.

5Always Keep Your Business and Personal Expenses Separate

Once you’ve got all of the above points set up, the rest is down to discipline and mindset. Of course, there will naturally be times when certain things slide. You might be running errands without your business cards and see something that you need for your company. Are you realistically going to go back later? Or are you going to use a personal card there and then? No one is perfect, and these instances are bound to happen. But if it becomes a recurring pattern, you’re only making your life harder on yourself in the long run.

We’ve mentioned these throughout the steps above, and as much as we hate to sound like a broken record, they definitely bear repeating… Here’s how to make a point of always keeping your business and personal expenses separate:

• Decide on a pay structure and automatically transfer payments from your business to your personal account.
• Don’t use your business credit card for personal expenses.
• Don’t use your business checking account for personal use.
• Track and record business expenses accurately.

How To Separate Your Business and Personal Expenses

Following the steps outlined above will help you build the right foundations to keep your business and personal finances separate. Use the information below to take it a step further, accounting for your business expenses, specifically:

• Separate any business receipts. It’s all too easy for all your personal and business receipts to get mixed up. Making a regular habit of going through all your receipts and separating any that are for business purposes will save you stress down the line, especially when it comes to tax prep. Remember to file and store receipts as supporting documentation for your tax return. You can check the IRS for specifics about how long to keep evidence (including receipts) of your expenses.
• Document when you use personal items for business use. Not every expense is purely business or personal. For example, you might use the same car to drive to the store, or deliver items related to your business. You might also run your business from a home office. These would be classed as shared expenses. Tracking this activity will help you accurately deduct the ‘business’ portion of these shared expenses.
• Track business expenses (including ‘shared’ ones). You need to track and accurately record your expenses so you, or ideally, your accountant, knows what you can legally deduct on your tax return. Having a separate business account, as well as debit and credit cards, will make this easier because you’ll have just one source to refer back to when recording your expenses. Accounting software can also make your life easier, but a well-structured spreadsheet works, too. Where relevant, remember to categorize transactions in your banking app or accounting software as a specific expense type. This will save you a headache down the line!

FAQs on Separating Your Business and Personal Finances

Learn How To Separate Your Business and Personal Finances With Flyte

Only 40% of Black-owned small businesses report good financial health. At Flyte, we aim to empower entrepreneurs of color in Louisiana with the knowledge and support they need to achieve financial wellness. Through our flagship Entrepreneur Empowerment Program, small business owners can access mentorship and training that covers how to separate your business and personal finances, so you can build the necessary foundations to thrive.

The program is completely free and is delivered remotely, meaning you can fit it around existing work and life commitments. We prioritize businesses owned by Black women from low- and moderate-income households; if that’s you, we’d absolutely love for you to apply.

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