Best Business Credit Cards in Canada [Checklist Included]

Best Business Credit Cards in Canada

Looking for a credit card for your business? The research process for finding the best business credit cards in Canada can be a bit like one of those logic problems where the farmer plants a tree in a field, but you have to figure out how many apples are in the barn and which farmer owns a cow. (Don’t panic, we’re here to help. And we promise: There’s no quiz at the end.)

With higher limits than personal credit cards, business credit cards help small and medium-sized enterprises (SMEs) free up cash flow by delaying payment on day-to-day expenses until a set point each month. For the average business trying to make ends meet on operational cash flow alone, this is a fairly significant benefit.

Business credit cards also help build a business credit history and they streamline expense tracking. Depending on your business, the rewards programs can also provide added perks. But, how do you know which credit card is the right one for your business?

What are the best business credit cards in Canada?

At PayPie, we wanted to know, too. So, we started by visiting the three review pages that topped our search results for the best business credit cards in Canada:

We also asked our CEO, Nick Chandi for his thoughts on choosing the best business credit card. He said:

“Best is subjective. There’s no single make or break variable. Some business owners may want travel rewards. Others, like myself, prefer cash back. It’s a matter of what’s best for each business.”

(We knew you’d pick the money, Nick.)

Read more: The 10 best businesses for cash flow. 

The top three business credit card brands in Canada

After comparing the tables from each of the sites above, we found that brand-wise, the top three business credit card in Canada are American Express®, Mastercard® and Visa®. In most cases, American Express offers its cards directly, while Mastercard and Visa are available through several Canadian banks.

How do the best business credit cards in Canada compare against each other?

The best ways to show a comparison is to create a table, which is exactly what we did. We took the best business credit cards in Canada from each of the top comparison sites and compiled them into this table.

Table: The best business credit cards in Canada

Our table comparing the best business credit cards in Canada is organized alphabetically by brand. It includes links to each brand’s or issuer’s main website as well as links to details for each individual card.

There’s a lot to compare and consider when choosing a credit card for your business. This is why we’ve also created a checklist with questions to ask and variables to consider. You’ll find it right below the table.

American Express®

Business Gold Reward Card

Card Type: Charge card (Balance must be paid in full each month.)

Rewards: 1 point for every $1 in purchases and 1 extra point for every $1 in eligible purchases from your choice of 3 participating vendors.

Employee Cards: $50 each

Interest: 30% annual interest rate for balances not paid in full.

Annual Fee: $250

Welcome Offer: 30,000 points with $5,000 in purchases in the first 3 months.

Business Platinum Card

Card Type: Charge card (Balance must be paid in full each month.)

Rewards: 1.25 points for every $1 in purchases.

Employee Cards: $199 each

Interest: 30% annual interest rate for balances not paid in full. | 55-day grace period.

Annual Fee: $499

Welcome Offer: 40,000 points with $5,000 in purchases in the first 3 months.

AIR MILES® for Business

Card Type: Charge card (Balance must be paid in full each month.)

Rewards: Earn 1 mile for every $10 in purchases from participating vendors and 1 mile for every $15 in other purchases.

Employee Cards: $50 each

Interest: 30% annual interest rate for balances not paid in full.

Annual Fee: $180

Welcome Offer: 2,000 miles with $5,000 in purchases in the first 3 months.

AIR MILES® Gold

Card Type: Credit card

Rewards: 1 mile for every $15 in purchases from participating vendors and 1 mile for every $20 in other purchases.

Employee Cards: Free (Misuse protection not included.)

Interest: Purchases 19.99% | Advances 22.99% | Missed payments 23.99% and/or 26.99%.

Annual Fee: None

Welcome Offer: 150 miles with $1,000 in purchases in the first 3 months.

Mastercard®

BMO®

Rewards® Business Mastercard®

Card Type: Credit Card

Rewards: 3 points for every $1 you spend on gas, office supplies and cell phone/internet bill payments. Earn 1.5 points for other expenses.

Employee Cards: Free

Interest: Purchases 14.99% | Cash advances 22.99% | 25-day grace period.

Annual Fee: $120

Welcome Offer: 35,000 points after you spend $5,000 in the first 3 months. Plus, no annual fee for 1 year.

AIR MILES® Business Mastercard®

Card Type: Credit Card

Rewards: 1 mile for every $10 in purchases and 1.5 miles for every $1 spent at Shell®.

Employee Cards: Free

Interest: Purchases 19.99% | Cash advances 22.99% | 25-day grace period.

Annual Fee: $120

Welcome Offer: Up to 3,000 miles after you spend $5,000 in the first 3 months. Plus, no annual fee for 1 year.

CashBack® Business Mastercard®

Card Type: Credit Card

Rewards: 1.5% cash back on eligible gas stations, office supplies purchases and on your cell phone and internet recurring payments. | 1.75% cash back at Shell®. | .75% cash back on other purchases.

Employee Cards: Free

Interest: Purchases 19.99% | Cash advances 22.99%. | 25-day grace period.

Annual Fee: None

Welcome Offer: 6% cash back on gas, office supplies and cell phone/internet bills for 4 months.

AIR MILES® No-Fee Business Mastercard®

Card Type: Credit Card

Rewards: 1 mile for every $20 in purchases and 1.25 miles for every $1 spent at Shell®.

Employee Cards: Free

Interest: Purchases 19.99% | Cash advances 22.99% | 25-day grace period.

Annual Fee: None

Welcome Offer: 500 bonus miles after the first purchase.

RBC

Business Cash Back Mastercard®

Card Type: Credit Card

Rewards: 1% cash back on eligible purchases. | Save 3¢/L on fuel and earn 20% more Petro-Points at Petro-Canada locations.

Employee Cards: Free

Interest: Purchases 19.99%

Annual Fee: None

Welcome Bonus: 2% cash back on eligible purchases for the first 3 months.

Visa®

CIBC

bizline® VISA® Card

Card Type: Credit Card

Rewards: None | Selling Point: Up to $50,000 credit limit.

Employee Cards: Free

Interest: Between CIBC Prime Rate +1.5% and Prime Rate +13%.

Annual Fee: None

Welcome Offer: None

RBC

VISA® Business Card

Card Type: Credit Card

Rewards: None | Save 3¢/L on fuel and earn 20% more Petro-Points at Petro-Canada locations.

Employee Cards: $12

Interest Rate: Purchases 19.99%

Annual Fee: $12

Welcome Offer: None

Scotiabank

VISA® Business Card

Card Type: Credit Card

Rewards: 1% cash back on all eligible purchases.

Employee Cards: Free

Interest: Purchases 22.99% | Cash advances 22.99%

Annual Fee: Silver card $75 | Gold card $105

Welcome Offer: None

Read More: What’s a Business Credit Report?

Choosing the best business credit card

When you visit the comparison sites and the credit card sites themselves, you’ll find that you get bits and pieces of information on the best business credit cards in Canada.

Once you identify your best choices, contact the credit card company and get answers to all your questions. Make sure you know exactly what you’re committing to and if it’s the right fit for your business.

Getting your questions answered will also give you a chance to experience the provider’s level of customer service. And — as a final step — don’t forget to do the math.

While we’ve found some of the best business credit cards in Canada, what really matters is finding the one that’s best for your business.

Checklist: Choosing a business credit card in Canada

According to the Forbes Coaches Council, asking questions represents a growth mindset. And, seriously, how else are you going ensure you understand exactly how your business credit card works? As promised, here’s our checklist:

Read More: A real-life cash flow case study.

Do you need a business charge card or credit card?

While a charge card has no pre-set limit, it won’t let you carry a balance from one month to the next and the interest for unpaid balances is high.  Purchases are reviewed based on your spending and payment patterns. (It’s not a blank cheque.)

A credit card has a set limit, but it also gives you the flexibility to carry a balance when needed. However, you’ll pay interest on the outstanding amount.

Note: If you already know that you’re likely to carry a balance, consider the interest rate you’ll be paying. This might either lower or outweigh the value of the rewards.

Will you need employee cards?

All of the cards listed offer employee cards. The difference is whether or not there’s a fee for each card. Another question to ask is if the employee cards include misuse protection.

The information for the American Express® AIR MILES® Gold Card made specific note of this exclusion. There’s always a reason for this kind of thing. It doesn’t hurt to ask why.

Do you want a rewards program?

Air miles, cash back and reward points are the main choices available. If you don’t want a reward program at all, the CIBC Bizline® VISA® is your card.

It’s hard to beat cash as a reward. Just make sure you understand how the program works and if there are annual maximums for your main and employee accounts.

If travel is a regular requirement, air miles might be a good fit. Some providers will let you roll over your miles into other travel programs, so check if this is a possibility.

If simple reward points are your gig, make sure you know when and where you can redeem them If you have company vehicles, a few of the MasterCard® options had alliances with specific gas stations.

If you’re considering a cash back program, find out if you have to use a specific gas station or if any gas purchase qualifies as a business purchase.

Is there an annual fee?

Each of the top three brands of the best business credit cards in Canada has cards with and without annual fees. Find out if these fees ever increase and, if so, has this happened recently in the pasts few years?

Both BMO® Rewards® and AIR MILES® Business Mastercards® wave the annual fee for the first year through introductory offers.

Among the cards listed, there’s no clear correlation between the annual fee and the interest rate or reward program

One thing to consider — in most instances, your annual credit card fee can be claimed as a business tax deduction. Interest fees can be claimed as well, but why pay extra when you don’t need to? It’s a cost-benefit sort of thing.

What’s the interest rate?

Make sure you know and understand what interest rate you’ll pay. Verify if there are different rates for specific activities, like cash advances or late payments.

If you’re given an introductory rate, find out how long this rate will be valid and when it’ll change. Ask how often the rates change and how you’ll be notified of rate increases.

Where is your business credit card accepted or not accepted?

One of the main benefits of having a business credit card is so that you can charge all of your expenses to the same account. If your business makes regular purchases from retailers or wholesalers, make sure the brand of business card you choose is accepted at those establishments.

What information do you need to apply?

According to Ratehub, you’ll need to provide proof that your business is valid business through documents including your articles of incorporation, business license, tax assessments or financial statements.

How long is the application process?

If you’re applying for your business credit card in anticipation of making a large purchase or using it to boost cash flow, you need to know the timeline. All the business credit card sites promote a quick approval process. But, as you know all too well, there’s never a one-size-fits-all solution.

Read More: Separating Business and Personal Finances.

The final step: Doing the math

You asked your questions, you’ve got all the variables. Now you need to do the math to determine which of the best business credit cards in Canada is best for you. This example from the Financial Consumer Agency of Canada (FCAC) shows you how it’s done. (Note: It also assumes you don’t use your card again until the balance is paid.)

Step 1 — Calculate your average owing balance or for simplicity, pick a rounded number and estimate. For this example, we’ll use $4,000.

Step 2 — Take your top credit card choices and run the numbers.

Example # 1 — Comparing business credit cards based on interest rates

In this example, we’ll pick two basic credit cards with no rewards programs. All we’ll look at is interest. While one card has a fee and the other doesn’t, the difference in interest rates is enough to offset any discussion of an annual fee.

Card # 1 — CIBC bizline® VISA® Card — no annual fee or rewards

$4,000 X 14.99% = $599.60 in interest

(At the time of publishing this article, the CIBC prime rate is 3.7%. If you add 13%, you get 16.7%. As that’s a worst-case scenario, we picked the lowest interest rate on our table 14.99% for estimation.)

Card # 2 — RBC VISA® Business Card — $12 annual fee, no rewards

$4,000 X 19.99% = $799.60 in interest, even without the fee.

$799.60 + $12 = $811.60 with the fee.

The winner — CIBC bizline® VISA® Card based on interest rates alone.

Example #2— Factoring in rewards, annual fees and welcome offers  

In this example, we’ve picked two BMO® Mastercards® — each with the same interest rate. Because of this, the value of the rewards programs and the annual fee will be the determining factors. Additionally, both cards have welcome offers, which are also taken into consideration.

Card # 1 — BMO® AIR MILES® Business Mastercard® — $120 annual fee | rewards miles program

$4,000 X 19.99% = $799.60 in interest

Miles = 1 for every $10

Using their calculator, if you spent $4,000 each month, in a year you’d earn 7,800 points. This is enough for a trip from Yellowknife to Maui or a high-end coffee maker. (With the welcome offer, you get $3,000 miles, so maybe you can get a milk frother to go with the coffee maker or fly from Vancouver to Maui.)

During the first year with no annual fee: $799.60 in interest

After the first year with an annual fee: $799.60 + $120 annual fee = $919.60 in interest and fees

Card # 2 — BMO® CashBack® Business Mastercard® — No annual fee | cash back program

$4,000 X 19.99% = $799.60 in interest

Cash back = 1.5% on eligible purchases (6.0% for the first 4 months), 1.75% at Shell® and .75% on other purchases

($3,000 X 6.0%) + ($500 X 1.75%) + ($500 X .75%) = $180 + $8.75 + $3.75 = $57.50 cash back

(After the 6.0% intro offer expires, the rate resets to 1.5%, which equals $45 when you have $3,000 in eligible purchases.)

During the welcome offer: $799.60 – $192.50 = $607.10

After the welcome offer expires: $799.60 – $55.50 = $744.10

The winner — BMO® CashBack® Business Mastercard® hands down — even when the annual fee is waived for a year on the other card.

(Now we really know where Nick was coming from in choosing cash back.)

Our Pick: The Best Business Credit Card in Canada

Our verdict is [insert drumroll]… the BMO® CashBack Business Mastercard®. Of all the reward formats, cash is the most universal. After all, a dollar equals a dollar. Point-based rewards have to be redeemed at specific locations and saving up miles is its own ball of wax.

Of the three cash back cards on our list, this one beat out the others because it had the highest rate of return — 1.5% on eligible purchases. It had the best welcome offer along with no annual fee (ever) and it’s the only cash back card with a 25-day grace period (perfect for those months when your cash flow doesn’t flow quite as expected).

Purchases and expenses are only part of your cash flow story

While a business credit card is a tool that can help you control how you track purchases and when you pay for expenses, it’s really just one piece in the puzzle.

A credit card statement only tells you what you’ve spent, it doesn’t give you any information on when you’ve been paid. A cash flow forecast puts all the pieces together by looking at all the aspects of your business that affect the money flowing in and out of your business.

Businesses live and die by cash flow. This is why PayPie is dedicated to creating tools that help businesses take charge of their cash flow and focus on growth and financial health.

Are you a QuickBooks Online user? Get started managing your cash flow today.

This information does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. It is also not an advertisement or endorsement for any of the banks or credit cards name. The credit card details are valid as of the publishing of this post.

Image via Pexels

Cash Flow Consulting in the Real World

cash flow stories Lucid and Groove

Technology is transforming the landscape of small business accounting. Empowered by the automation and innovation fueled by artificial intelligence (AI), the cloud and blockchain — now, more than ever, accountants are expanding their roles as business advocates and advisors.

It’s a trend backed by a 2016 study by the International Federation of Accountants (IFAC), which found that 41% of entrepreneurs believed accountants were their most trusted advisor — nearly double that of the 21% for other business consultants.

Many of the accountants advising the small to medium-sized businesses (SMEs) are small to medium-sized practices (SMPs) themselves. What kind of help do SMEs need? One of the main areas driving demand for advisory services is cash flow consulting.

Cash flow consulting in the real world

Here’s a real-world account of how SMP, Lucid Advisory & Finance, helped SaaS help desk software provider Groove find its rhythm with cash flow forecasting, budgeting and everything else.

Lucid Advisory & Finance

Lucid Advisory & Finance founding partner, Nick Bird, has discovered that helping businesses better understand the basics of cash flow and cash flow forecasting (through cash flow consulting) is having a huge impact on the startup, SaaS and crypto companies his firm serves.

“When we first meet with a client, we ask them, ‘Where do you want to be in five years?” he explains. It may seem like a broad question, but the answers are quite telling.

“If you don’t know where you want to go, it’s really hard to make a plan to get you there. Tracking your metrics, including cash flow, isn’t just an abstract chore, it’s a tool for better decision-making.”

In fact, his favorite part of his job is seeing his clients flourish, make well-informed decisions and grow their business.

Nick Bird Lucid Quote

How businesses benefit

According to Bird, once business businesses start looking at their cash flow and financial metrics more carefully, they also gain:

  1. Confidence — Through better, more informed decisions.
  2. Accountability — By comparing performance to projections.
  3. Peace of mind — Knowing that they’ve taken greater control of their financial health.
Read more: Cash flow 101 — the basics

How cash flow consulting works

As part of the cash flow consulting process, financial professionals like the team at Lucid will review a business’ cash flow statement on a routine basis. The time period, like holding monthly recaps, depends on the specific needs of each business.

If a business doesn’t have a cash flow statement, their advisors will either use accounting software to create a basic statement or take advantage of integrated solutions, like PayPie

By reviewing cash flow statements on a regular basis, companies are able to see how the cash flows in and out of their businesses in terms of day-to-day revenue and expenses, as well as capital investments and borrowing activities.

What businesses can learn 

Through this process, a business can pinpoint when most of their regular bills and responsibilities, like payroll, hit the books — in comparison to when the bursts of revenue come in. For example, for an SaaS company, this would be when the subscription fees are processed.

Knowing this cadence helps a business be more precise in knowing when their cash reserves are highest and lowest. Over time, these patterns are used to create cash flow forecasts that serve as performance benchmarks.

3 benefits of cash flow consulting

How cash flow informs decision-making

As metrics change and there’s a drop, the monitoring helps provide insight into where the problems may lie. Conversely, if things hold steady or improve, a business can take confidence in knowing they’re on the right track.

They can also use this information to plan their next steps. Is it time to hire new staff? Develop a new product? Raise prices? All of these decisions are affected by cash flow, which means the more you know, the better decisions you make.

More tips: How to read a cash flow statement 

Case study: helping Groove chart an even course

When Bird first met, Groove founder and CEO, Alex Turnbull in 2016, Turnbull was like most startup CEOs. He was hyper-focused on his product. Yes, he checked the business’ banking account. But, he didn’t track any key performance indicators (KPIs) and he certainly hadn’t been spending the few hours reserved for eating and sleeping for keeping the books.

It’s a scenario that’s all too normal. It’s not a criticism of entrepreneurs. Starting your own business is HARD. Unless you’ve been through it before — most businesses, even the high-tech ones, don’t always realize how vitally important cash flow management and cash flow consulting really are.

A breakthrough in the form of a trusted advisor

Because they’re busy getting their businesses off the ground, concepts like working capital or debt-to-equity ratio aren’t always top of mind for business owners. While everyone wants to avoid a cash flow crisis, no one is building a damn or even watching the water to see if there’s impending doom.

“Alex is a bootstrapper. He’d put a ton of sweat equity into his business. He’s also an amazing marketer and the Groove blog is one of the best SaaS startup blogs I’ve ever read. But, he wasn’t an accountant and there’s nothing wrong with that.” says Bird.

cash flow story Alex Turnbull Groove Quote

Baby steps…

Once Bird and Turnbull discussed Groove’s needs and goals, Lucid got things rolling by creating a one-year budget and, in time, a three-year budget.

In conjunction with the long-term forecasts, Bird and Turnbull meet monthly to go over Groove’s financials. A typical agenda, looks a little something like this, with reviews of:

  • Previous action items
  • Overall performance
  • Trends
  • Variances
  • Projections
  • Staffing

Grown-up questions

By answering questions, like the ones below, Lucid helps Groove make more precise, data-driven decisions.

  • How quickly do you want to reach this goal? (“Now” is an acceptable answer. The question after that is, “Is this realistic?”)
  • What resources do you have right now — and what will you have in a few months?
  • What level of cash in the bank are you comfortable with?
  • How is the business performing compared to this time last year?
  • What options are available if the detestable Mr. Murphy and his famous law make an appearance?

Big picture thinking

“The awesome part of doing this is that we were able to help Groove manage their cash flow so efficiently, they could hire as quickly as needed to get the next update up as quickly as possible,” says Bird, genuinely excited about the results. (There’s really something to be said about having a passion for what you do.)

Turnbull concludes, “I’ll admit. I approached asking for help with cash flow and financial management with about as much enthusiasm as dental work. Thankfully, I met the right team. Now, when Nick gets me to open my mouth, it’s always for the greater good of my business. The only pain is a few really bad jokes now and then.”

“In all seriousness, the process has been transformative. There’s truth to the adage that says it’s better to work smarter than harder. I sleep better at night knowing there are no financial monsters hiding in my closet.”

Real-life cash flow stories matter

At PayPie, we believe that businesses should be empowered with the best tools to give them insights into their cash flow and manage their overall financial health. It’s also why we offer our cash flow forecasting and risk scoring free of charge.

Whether it’s the businesses themselves or the accountants and bookkeepers who serve them, we make it easy to look at your finances, without looking away in frustration.

Want your cash flow story to be told? Tell us here. We’re looking for real-world cash flow management and funding stories from businesses and the professionals who advise them. 

Thank you

In closing, we’d like to personally thank Lucid and Groove for sharing their cash flow consulting story. Their experience truly shows how an openness from both sides yields a much greater good.

Bonus content:
The untold stories of Nick Bird and Alex Turnbull

When everyone has their professional hats on, it’s easy to forget the human side of what we do. Here’s a little about Nick Bird that most people may not know: He’s one of seven children. He lived in Brazil and speaks Portuguese and is a single father to two children.

When Alex Turnbull isn’t building startups, he’s probably on a surfboard somewhere along the coast of Rhode Island. Alex and his wife have a dog named Honey Badger. There’s no word on whether or not the pup can surf.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This story is being shared on an informational basis only. Every accounting firm and business has their own unique needs. Be your own success story by taking the time to find the right fit.

Image via Pexels.

The Golden Rule: Separating Business and Personal Finances

separating business and personal finances lifestyle image

You’re at the warehouse store. In your cart that’s roughly the size of a compact car, you’ve got a printer, a few boxes of paper, some ink and a year’s supply of pens for your business. But, for home, there’s also cereal, milk, a closet organizer and a brand-name sweater that’s just a steal. (Besides, you’re getting the organizer.)

When you get to the register, do you do the right thing and ask for separate receipts? Or, desperately try to save five minutes by putting it all on one bill. (You’ll sort it out later, right?)

You know that separating business and personal finances is the right thing to do. But, sometimes you let it slide, just a little. You’re not alone. Nearly one out of every five business owners don’t have separate personal or business bank accounts.

Nearly 1 out of 5 business owners don’t have separate personal or business bank accounts.

Because committed to helping businesses build better financial health, we want to give you an overview of one of the 10 commandments of small business accounting — keeping your business and personal finances separate. We try not to get preachy, but in this case, it’s warranted. (Read on and you’ll see.)

Is separating business and personal finances really a big deal?

Yes. Your business is your business and personal finance is something entirely different. If you’re the owner or founder, the two are inextricably linked. However, as a best practice, you want to have things set up so that the two are separate from the start and that they stay that way.

Don’t be afraid, but separating business and personal finances means you kind of have to learn to think like an accountant. Or, work with one and you’ll quickly learn why most independent business owners value their relationships with their accountant and/or bookkeeper so much. (If you behave yourself, they’ll let you keep your warehouse membership, too.)

Read more: Cash flow 101 — the basics. 

What is commingling and how does it relate to business and personal finances?

Aside from sounding a little naughty, commingling is the formal term for mixing business and personal finances. Depending on your background and beliefs, it’s akin to living together before marriage.

Separating business and personal finances isn’t just a stigma thing. There are serious legal and financial consequences to getting this wrong, including:

    • Liability — Whether an entity or individual can make claims against you and your business. Depending on how your business is structured or the nature of the claim, your personal assets could be at risk as well.
    • Penalties and fines — If you make a mistake on your business or personal taxes because you’ve commingled your business and personal finances, it can result in penalties and fines. Most of which also accrue compound interest, regardless of whether they apply to your business or personal income.
    • Risk — Anyone evaluating the financial health of your business will see a lack of separation as a potential concern. This includes lenders, credit bureaus, vendors, investors or anyone interested in developing a professional and/or financial relationship with your business.

When you separate your business and personal finances through routine and processes, you’ll see the following benefits:

    • Accuracy and transparency — Your personal accounts will reflect personal expenses and your business accounts will reflect business expenses.
    • Better cash flow management — When things aren’t mixed, you’ll have a clear picture of the factors involved in your business and personal cash flows.
    • Easier tax filings — Proper management and tracking of business and personal income makes it simpler to file taxes and claim deductions. Better processes and recordkeeping also means fewer mistake and that you’ll be more prepared if you’re asked to provide documentation.
Read more: Understanding cash flow statements. 

Where do I start when it comes to separating business and personal finances?

Believe it or not, the first thing you should consider is your business structure. If you’re starting your own business, you need to know the legal and financial implications of whether or not you choose to incorporate.

A discussion of business structures can get very complicated very quickly. For the sake of simplicity, we’re going to stick with the difference between incorporated and unincorporated businesses in this post.

Sole proprietorships — separating business and personal finances and cash flow

The most common type of unincorporated business structure is a sole proprietorship. In fact, the term unincorporated business is almost synonymous with being a sole proprietor.

While sole proprietorship is the simplest business structure, it can also be a bit of a bugaboo when it comes to separating business and personal finances. As a sole proprietor, you’re entitled to all the profits from the business. This also ties you to all the responsibilities as well.

In the eyes of the tax authorities, a sole proprietor’s business and personal income are one and the same.

As such, a sole proprietor files their business taxes as part of filing their personal income taxes.

    • Because a sole proprietor’s business and personal finances are so closely linked, sole proprietors are also the most likely not to follow the golden rule of separating business and personal finances.
    • The result: Sole proprietors are more likely to be audited than any other type of business.

When a business owner fails to keep business and personal finances separate, it’s more difficult to provide the proper documentation to validate legitimate business expenses.

If the business owner hasn’t kept their business and personal finances separate, the audit process will take longer. Hint: Grumpy tax agents aren’t a good thing. (Ever tried getting out of the warehouse store without a receipt and your membership card?)

The good news is that with a few simple measures, like having a separate business banking account and credit card, it’s easier to track business expenses separately from personal ones.

Sole proprietors who work from their home are also able to claim the home office deduction, writing off a percentage of home-related costs as business expenses. Again, this has to be done the right way and when it’s done well it can deliver significant savings.

Two other considerations for sole proprietors are liability and employment taxes.

One of the main reasons businesses incorporate is to make the business its own legal entity. This greater separation means fewer implications for the owner’s personal assets in the event of any legal or corrective action. It’s also key if a creditor comes knocking at the door.

Another tax-time surprise that most self-employed sole proprietors encounter is self-employment taxes. If you’ve ever worked as an employee for another business, your employer would have deducted and or paid part of your employment taxes (income tax and taxes for pensions and social programs) throughout the year.

The hammer drops when the employer and employee are one in the same.

This is why sole proprietors have to pay these mandatory taxes — making both the employer and employee contributions. If you’re unprepared for this, it can be a major hit to your tax bill and your cash flow.

Separating business and personal finances improves...

Incorporated businesses — business versus personal finances and cash flow

When a business formally incorporates by becoming a corporation, the process of separating business and personal finances tends to be more formalized. For instance, most corporations will have their own banking accounts and tax identification numbers (tax IDs) right from the start.

Corporations are taxed as separate entities.

This means that in a legal sense, a corporation’s assets are more clearly differentiated from an individual’s personal assets — even if the individual is the CEO. This separation is often called the “corporate veil.”

If an incorporated business defaults on a loan or faces any other corrective action, in most cases, only the corporation can be held accountable. Note: It is possible to “pierce the corporate veil” — meaning incorporated businesses need to be aware of the liability laws in the geographic and regulatory areas in which they operate. A loss or penalty in this area can definitely hinder cash flow.

Corporations are responsible for following the applicable tax timelines and reporting guidelines.

This includes payroll taxes with required employer contributions, payment and reporting guidelines. Employers in the United States often have to manage employment taxes on a federal, state and local level. Mistakes at any stage of this process can be costly.

Mixing business and personal finance increases

Five ways to keep your business and personal finances separate

As stated above, corporations often have systems in place, simply by the nature of what they are. Sole proprietors, partnerships, cooperatives and the startups of the world are the ones who really struggle with separating business and personal finances. If you resemble these remarks, these tips are for you:

1. Open business banking accounts.

When you use your business banking accounts for business all the transactions relate only to your business — as they should. It’s easier to reconcile with your accounting software and it’s a must-have if you’re going to use a payroll service or apply for financing. The bottom line: It makes your business look and act like a business.

2. If a credit card makes sense for your business, get one.

Just like having a business banking account, using your business credit card just for business expenses is a better way to separate business and personal finances. You can also take advantage of rewards programs. Note: Make sure that you’re able to pay off the monthly balance. Otherwise, the interest charges could outweigh the benefits. A credit card is best for short-term purchases. If you need to fund a large, long-term business expense, make sure you know all your options ranging from a line to credit to small business loans.

3. Pay yourself a salary.

Even if you’re the only employee, paying yourself a set amount each month is another best practice for separating business and personal income. First, it gives you a consistent income. Second, you also set a consistent expense for the company. It’s a boost for both your personal and business cash flow. You’ll know how much you have to live off each month and you’ll be able to track how and when this comes out of the company’s books as well.

If you set this up formally, a salary for a self-employed sole proprietor is called a draw. If you use payroll software, you’ll automate the process of moving the money from your business to your personal account. It will also help you manage your employment taxes and when business and personal income tax time comes around, you’ll have the right records and documentation.

4. Know the difference between business and personal expenses.

In order to claim an expense as a deduction for either business or personal income taxes, the expense has to be properly classified and documented.

A business expense relates to the running of a business.

Tax deductions for the costs of owning or leasing office or retail space are examples of legitimate business expense. A personal expense is just that — it relates to your private life and has nothing to do with the operation of your business. In other words, grabbing a quick lunch during the work day is not a legitimate business expense. In fact, it’s not even considered a legitimate personal expense for tax purposes.

Gray areas include the use of personal assets for business purposes along with travel and entertainment expenses.

Having a home office, running a business from your home or using your personal vehicle for business are examples of using personal assets for business purposes.

Wherever you do business, there are specific rules for the definition of business use and the number of expenses you can claim. For instance, if you plan to claim home office expenses, you need to know which expenses qualify and how you need to track them throughout the year. The same is true for tracking business mileage, maintenance and other vehicle expenses.

Travel and entertainment expenses also have to be directly related to business functions.

If you bring your family on a business trip, in most cases, you can only deduct the costs of your travel expenses. (Unless your 5-year-old is an employee.) Bringing a spouse along on a business dinner will likely be accepted as a business expense. But, if you and your spouse go out to dinner because you’re too tired to cook, it probably won’t be covered. (Unless you’re both employed by the company and you were working on a deadline. See? Gray area.)

5. Develop systems for tracking business and personal expenses.

Once you know which business and personal expenses you need to keep records for you can then create systems for tracking them — all while keeping your business and personal finances separate.

Businesses can track expenses in their accounting software.

A process that’s made easier with the use of expense tracking tools, like SlickPie. (The best way to find these tools is to look in the app store for the accounting software you use. If you have an accountant, he or she will probably recommend a tool like this.)

Apps for tracking personal expenses, like Mint or You Need a Budget (YNAB), fall under budgeting and personal finance.

Remember personal tax deductions are a lot more limited and specific. Think child -and health-related costs or improvements to your home to make it more accessible or energy efficient.

Circling back to the previous bullet, the key is knowing which expenses business and which ones are personal. If you know this in advance, you know whether it applies to your business or personal finances. Business expenses should flow through the business using business banking accounts and/or credit cards. In turn, personal expenses should pass through personal banking accounts and/or credit cards.

Read more: The 10 Best Businesses for Cash Flow. 

The moral of this post…

Some historians believe the nursery rhyme Baa Baa Black Sheep dates back to a medieval wool tax imposed in the 13th century England.

The golden rule of separating business and personal finances also has its origins in the real world.

Separating business and personal finances makes it easier to monitor a company’s cash flow. It also makes this process more accurate when un-related, personal expenses or income aren’t there to cause confusion. In the same vein, personal financial management and budgeting are easier to when you don’t commingle cash flows.

Tax time is a million times easier if you’ve kept your business and personal finances separate. So is building a credit history for your business or yourself. Both your business and personal risk profile will be stronger if you’ve followed the rules.

More money rules to follow

Monitoring business cash flow and knowing your risk profile is another mark of good financial behavior. This is why PayPie is making it easier to understand these concepts by offering these tools free of change. Got a QuickBooks Online account?* Get started today.

*PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is intended to be informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

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