Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006).
Dear To Her Credit,
I've recently started my own business. What is the difference between my everyday credit card and the cards advertised as business charge cards? Can I just use my personal card for my business? I hate to open one more credit card account. -- Mary
Dear Mary,
You can use either a personal card or a business card for a small business, and many people do. However, as your business grows, you may get more benefits if you use a card that is advertised as a business credit card.
What's the difference between the cards for business or personal use? If your business is a sole proprietorship or a general partnership, there probably isn't much. You may not even know if it's set up as a personal or a business card. The card works exactly the same either way.
The big distinction is between small business cards and corporate cards. Tom Dailey, consultant to the credit industry says, "Small business cards look a lot like consumer cards." Corporate cards, however, are a different story. "They carry the ability to restrict or add users, or to place spending restrictions by user." In addition:
Corporate cards provide much more detailed reports to help companies track spending.
Personal and small business cards may or may not have an annual fee; corporate cards almost always do.
Personal and small business cards typically have revolving credit; corporate cards usually must be paid in full every month, according to Dailey.
Some business cards have richer rewards.
From the merchant's perspective, credit card companies assess a much higher fee on all purchases made on corporate credit cards.
The bigger issue than business versus personal card is whether you keep your business and personal expenses on different cards. You must keep your business and personal finances separate -- no exceptions. If you go to Costco or Sam's to get office supplies, and you pick up a few groceries while you're at it, put them in separate carts and use the right cards. (Don't worry, the checkout clerks are used to it.)
Here's why keeping your business expenses on a separate card is so important:
It keeps you in better standing with the Internal Revenue Service. "People who cross-pollinate their expenses are at risk for more stepped-up activity from the IRS," says Rich Boggs, tax resolution expert of Nationwide Tax Relief. Boggs says that in recent years, the IRS has looked very closely at people who mix business and personal expenses.
If you have tax problems, your options are limited if your expenses are combined. Boggs has seen clients back away from using an Offer in Compromise to reduce tax debt because they don't want the IRS to put their records under the magnifying glass. "They (the IRS employees) leave no stone unturned," says Boggs.
To build a credit history for your business, you must have separate cards. This is only an issue if you have a corporation or an LLC.
If the IRS questions if you are running a business, not a hobby, having separate bank accounts and credit accounts helps prove you are operating in a business-like manner.
You'll pay more for legal and accounting services if someone has to sort through your personal and business expenses.
Many people get used to using their businesses to pay their personal expenses. They say it's their money, so they don't see
what difference it makes. The problem, however, is that they're not paying
Social Security and income tax on that money and eventually they get in trouble
with the IRS. Boggs says, "It's a rude awakening when somebody has an
audit. It can be devastating."
For your new business, you'll probably choose a card based on annual fees, interest rates, and perks. As your business grows and you incorporate and hire employees, you'll probably want a corporate card. Until then, as long as you use a separate card for all your business expenses, you should be fine.
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