If you’re a business owner, keeping your business spending separate from personal spending is more than just a best practice—it’s protection from potential legal issues and red flags from the IRS. Quarantine your business and personal lives with a few easy steps, and QuickBooks Online can streamline the rest for you.

Here’s what small business owners need to know about how to use QuickBooks Online to keep business and personal finances separate.

Why mixing business and personal finances is risky

When you mix business and personal money, you risk losing a major benefit of having an LLC or corporation: protection from personal liability if your business gets into trouble (think excessive debt or lawsuits).

You may have heard the term “piercing the corporate veil.” When you mix personal and business expenses, a court may decide that your business isn’t truly a separate entity, meaning your personal assets (your car, savings, even your home) can be taken by business creditors or lawsuits. In other words, trouble with your business can lead to losing personal money.

But LLCs and corporations aren’t the only businesses that benefit from keeping business expenses separate. On the tax side of things, mixing finances can trigger an IRS audit. Personal expenses that appear on a business account (or vice versa) can bring into question all the other transactions on the account. If you’re unable to prove that certain expenses are write-offs, you may lose out on legitimate deductions.

Set up a dedicated business bank account and credit card

To maximize QuickBooks Online for business and personal expenses, you’ll first want to open dedicated business accounts, namely, a business checking account and a business credit card. Then use them exclusively for your business.

It’s worth underlining: If you don’t use your business accounts exclusively for business, QuickBooks Online’s automation won’t be of much help. The program can only categorize your transactions accurately when it doesn’t have to untangle personal and business spending.

Depending on the structure of your business, you may need either your Social Security number or an EIN to open your business accounts. Once both are open, simply connect them to QuickBooks Online.

Create your QuickBooks Online company file correctly

Setting up QuickBooks Online is relatively simple, but it’s worth taking your time to do right. This is the backbone of your books. Make an error at this juncture, and it can throw everything off.

Choose the right business structure and entity type

When setting up your account, QuickBooks Online will ask what type of business you are and which tax form you file (sole proprietor, corporation, partnership, etc.). The way you answer will shape how the program treats your income, equity, and taxes. If you’re not certain, it’s worth ringing your accountant or checking your business registration documents.

Link only business accounts to QuickBooks Online

After you’ve set up your file, you can connect your business checking account and business credit card with a few clicks. Within the “Accounting” tab on the left side of the page, select “Bank Transactions” from the drop-down menu. You’ll then find a “Link account” button in the top right corner where you can connect your bank details and have them automatically feed into QuickBooks Online.

When you select your eligible bank, you’ll be given the option to link all accounts you’ve got with that institution. Remember to only check your business accounts.

Categorize and tag transactions properly

After your accounts are connected to QuickBooks Online, the software will start automatically pulling your transactions. It’ll begin to categorize your expenses as it learns to identify what’s what—but you should still double-check its results to make sure it’s entirely accurate.

Use the chart of accounts to separate expense types

Also under the “Accounting” tab you will find a “Chart of accounts” option. This is a master list of every category your money can move through—from your checking to a sale to a software subscription. If there’s movement, QuickBooks Online wants to know what it was.

From this chart, you can review, add, and edit your unique categories. You can make it as broad or specific as you like, but don’t overwhelm yourself.

Flag personal transactions as owner’s draws or distributions

It’s very possible that a personal transaction will make its way into your business account at some point. When that happens, it’s best not to just delete it or leave it uncategorized.

You should record it accurately by either labeling it as a shareholder distribution or an owner’s draw by creating an owner’s equity account within QuickBooks Online—depending on your company structure. This ensures the transaction stays off your profit and loss report. Alternatively, you can reimburse the company from your personal funds.

Pay yourself the right way in QuickBooks Online

On a related note, the way you take money home also depends on how your business is set up. You may either be on payroll yourself and take separate shareholder distributions, or you’ll instead make an owner’s draw.

Owner’s draw vs. salary: what to record and how

Again, sole proprietors and single-member LLCs must create an equity account in QuickBooks Online. Then you can move money from your business account to yourself and record it to that account. This doesn’t appear as an expense on your profit and loss, but it instead lowers your equity.

Meanwhile, a corporation should handle your pay through payroll as salary with taxes withheld. Any additional money you withdraw should be coded to a shareholder distribution equity account.

Run reports to audit the separation

You’ve put the initial time investment into setting up your QuickBooks Online account. At this point, it’s a good idea to run a report to:

• Spot personal expenses that you may have missed
• Confirm owner’s draws are tracking correctly
• Check if each line of business is sticking to its budget

Rolling over the “Reports” tab on the left side of the page, you’ll see a “Standard reports” link. Click on that, and you’ll be given several dozen report options, one of which is “Profit and Loss.” You can then choose a date range and run your report.

Quickly scan the expenses section for any suspiciously personal transactions and reclassify them as an owner’s draw or shareholder distribution. This will remove them as a business expense.

The takeaway

Mixing business and personal finances is a bad idea for multiple reasons, including a messy tax season and potential to lose personal assets in the event that your company is sued.

It’s wise to open some business accounts, such as checking and a credit card, and use them for 100% of your business spending. This can help to unlock the power of QuickBooks Online, as it automatically pulls in your transactions from those accounts and remembers how you categorize them. It’ll keep your books organized with a fraction of the manual labor.

Frequently asked questions

Can you use QuickBooks Online to track both business and personal finances? 

You can use QuickBooks Online to track both business and personal finance—but it’s designed for business. To avoid mixing your two financial lives, those wishing to also track personal expenses will probably want to create an entirely separate “company” file that only focuses on your personal money.

Do I need a separate bank account to use QuickBooks Online for my business?

You technically don’t need a separate bank account to use QuickBooks Online for your business, but it makes your life exponentially easier when it comes to tax time—and it can help you preserve that legal separation between your business and personal assets in case you’re ever sued or take on unmanageable business debt.

How do I record a personal expense that was accidentally paid from a business account in QuickBooks Online?

To record a personal expense that was accidentally paid from a business account, change the move from a business expense to an owner’s draw or shareholder distribution (depending on your company structure). That way it stays off your profit and loss.

Should I use QuickBooks Online as a sole proprietor?

You can absolutely use QuickBooks Online as a sole proprietor. It’s worth mentioning that QuickBooks has a free and less souped-up version called Solopreneur which can be perfect for those with a less complicated income.

When should I hire a bookkeeper or accountant instead of using QuickBooks Online myself?

QuickBooks Online makes your business finances much easier, but it’s not enough for everyone. You should consider calling in a pro if managing your QuickBooks Online account begins to feel like a second job. Time is money, too.