Drawing The Line Between Personal & Business Credit Cards
This is a guest post by Michael from Credit Card Forum.
If you own a big corporation, it’s quite easy to keep your personal finances separate from your business finances. Unfortunately it’s not so simple if you are self-employed, a small business owner, or just have a little side venture. The lines can easily get blurred since you and your business can sometimes seem like one entity. Yet it is for these groups where it is probably most important to keep credit and finances separate. Here are five reasons why.
#1: Income Taxes
If you are a sole proprietor or have pass-thru taxation on a LLC, partnership or S-Corp, you will have to report your share of revenue and expenses on your individual tax return. But if you’ve been using your personal credit cards to pay for business expenses, separating all your charges at tax time will be one heck of a headache! Not to mention, in the event of an audit, my guess would be that the commingled credit card expenses won’t exactly be putting your best foot forward when you meet with those friendly gentlemen from the IRS!
But the commingling will be an even bigger mess if you carried a balance and plan to deduct the interest paid on business purchases. Because credit card interest begins from the day of purchase, you would actually have to go through and individually calculate the daily interest charged on your expenses. And what about the minimum payments? I have no clue how those would be allocated. These predicaments would have been avoid by simply using a dedicated business credit card!
#2: Liability
If you have a separate business entity (i.e. LLC or corporation) then it’s important to not mix business and personal finances for liability reasons. Why? Because if you ever get sued, that can lead to piercing the corporate veil, which is the removal of the liability shield between yourself and your business.
When that happens, you can be held personally liable for what happens with your business. When finances are commingled, the other party can argue that your business entity is not bona fide and separate, and therefore, neither is your liability. If a judge agrees, the corporate veil is pierced. This is yet another reason to use a separate business credit card!
#3: Building Business Credit
One of the main advantages of having a business entity is the ability to build separate credit for it. Of course to do so, you will need to establish lines of credit using the business (under its DUNS number). A business card may be able to help you do that.
However, even the best business credit cards won’t necessarily help with this. Sometimes, it’s a bit of a Catch-22. If you apply using your Social Security Number as a personal guarantee, as long as your account is in good standing many banks won’t report your transactions (neither to your personal credit file nor your business credit file). If you apply only under your DUNS, it will show up on your business credit, but banks are so tight-fisted nowadays that most require a personal guarantee unless your company is at least two years old and has a credit history.
I advertise a number of business cards on my website, including those from American Express and Chase. To the best of my knowledge, those from AmEx do not report to Dun & Bradstreet if you apply under your SSN. However the Chase Ink business credit cards will report to D&B, even if you apply under your SSN (assuming you also provide your DUNS). If your business is newer and you want to get a credit card solely under your DUNS, then I would recommend trying one from a gas station or office supply store.
#4: Preserving Personal Credit
In times like these, who knows what the economy will be like tomorrow. In the event things go downhill and your business takes a turn for the worse, the last thing you want is for your company’s debts to mess up your personal credit. But that’s exactly what will happen if your business debt is riding on your personal credit!
#5: Professionalism
So you’re at some fancy-schmancy restaurant with a client and are about to close that big deal. What do you think looks more professional: whipping out your regular ol’ credit card or your business credit card? Obviously the latter. Whether we like to admit it or not, presentation and appearances are important aspects in business, especially if you're in sales.
Conclusion: For both your personal and business credit, it’s important to have separate cards!
Michael operates Credit Card Forum, a community for the discussion of all things credit. He writes reviews for the best business credit cards, including a recent in-depth look at the Chase Ink business credit card mentioned above.
