A Guide to Separating Personal Credit from Business Credit

Entrepreneurs, new to the business world and looking for cash to finance a new business venture, often rely on personal cash resources and personal credit, rather than business credit, to get their venture off the ground. There are no legal impediments to keep a sole proprietor or partnership from doing so. Tracking and documenting expenditures as business or personal will allow your accountant to sort one from the other at tax time.

However, there comes a point in any successful venture when the differentiation of personal credit from business credit is key not only to satisfying tax law but to protecting your own assets as well. A business owner has crossed the line in terms of their own personal financial security when personal assets become collateral for business debts, or when they personally guarantee mortgages on real business property. Personal credit maxed out to cover business expenses is a liability that can cost the right to buy real estate or other major purchases. Without proper business credit one becomes liable as an individual should the business fail.

Changing from a sole proprietor to a limited liability company or S corporation is the first step in limiting personal business liability. The next is to separate completely personal accounting from business accounting and keep it separate This includes separate accounting, separate tax preparation and separating personal credit liabilities from business credit liabilities.

Using credit to finance business is commonplace. Business credit is just that. It is purchasing power granted a business in order to facilitate operations. Debts incurred through the use of Business credit cards need only be reimbursed through business revenues. Business credit card issuers cannot demand payment from you, an individual, should the business fail. The only recourse for business credit providers to recoup losses is through the liquidation of the business itself or, hopefully, the restructuring of the company so that it will be able to satisfy its debts while remaining in operation. In any event, the owner's personal assets cannot be tapped to satisfy business debt.

Going concerns can use business credit in a number of positive ways to improve their bottom lines. Business credit cards facilitate accounting by itemizing each expense, and its tax category. Prudently used, business credit can carry a company through a lean cash flow period. Responsible handling of business credit cards can improve a business's perceived credit worthiness and facilitate the purchase of high cost items necessary to business expansion.

The business world can be an uncertain place. The availability of business credit is a valuable resource against eventualities. It makes good sense if you have used personal credit lines as business credit to separate these out and then develop business credit lines you can count on.