You can legally use a small-business credit card for all of your spending, but there are advantages to keeping them separate
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Dear Your Business Credit,
My name is Catt, and I’m running a business as a sole proprietor with a DBA. I decided to get separate bank accounts so that I could keep my business and personal records separate. The bank’s business checking account included a business credit card, so I applied for a business travel credit card, as I travel out of the country frequently, and it sounds wonderful to have no foreign transaction fees!
Anyway, my banker said I can charge anything I want on the credit card — from gas to shopping to groceries to business expenses. I asked him if this was commingling my business expenses with my personal expenses, and he said as a sole proprietor it’s legally allowed.
I was wondering if I could do it this way: 1) Use my credit card regardless of being a business or personal expense 2) Pay off the card with a respective business or personal checking account 3) Keep really, really good and clear books?
Do I run the chance of being audited by the IRS this way, or would this be a legit way to separate my funds? Also, would it be harmful in any way to my card or my financial health? Thank you! — Catt
It sounds like you are off to a great start in building both your personal and business credit. Without strong personal credit, it would have been harder to get a business card — which typically requires a personal guarantee — right off the bat. And opening a business checking account, as you’ve done, is a key first step toward establishing business credit.
But if you do get audited, you might have to produce those receipts. In that case, it might be harder to prove that an expense was for work if you used the same card for business and personal expenses. If you dine out the Four Seasons in New York during a business trip, for instance, you’ll need to keep very good records about whom you met there and why. Otherwise, it could just as easily seem to be a vacation splurge to an auditor.
Many business owners have good intentions about keeping scrupulous records, but can’t always keep up with them during busy periods. It is much easier to maintain separation of business and personal expenses if you use a separate card for business expenses.
The real disadvantage with using a business card for personal expenses is that it does not have the same protections as a personal card, as I discussed in a previous column, “Business card benefits outweigh limitations for most businesses.”
For instance, you have less protection under the Truth in Lending Act than you would with a consumer card. Under that law, consumer card issuers must make detailed disclosures that help you compare the costs of using them. The main protection business card holders get is from being liable for more than $50 in unauthorized charges.
That said, many small business card issuers voluntarily share details such as annual percentage rates, finance charges and penalties, using the same type of tables they do for consumer cards, according to a report by the Federal Reserve Board that I discussed in that column.
But by using a business card for all of your charges, you also miss out on some extra protections consumers won under the Credit Card Accountability and Disclosure Act of 2009, which do not apply to small-business cards. For instance, consumer cardholders must be notified in writing 45 days in advance of rate increases on new transactions and must get the choice whether to pay over-limit fees if they make charges that exceed their credit limit. Otherwise, the charges get rejected. The Fed found that some small-business card issuers are adopting such terms for their business cards voluntarily, but you need to look at any contracts you signed to see what your issuer promises to do.
My advice to you is to use the business card for work, and use a separate personal card for everything else. To build even more separation between your business and personal finances, it might make sense down the road to ask your attorney or accountant if it makes sense to form a business entity such as an LLC. But there’s only so many of these projects a business owner can handle at a time. Tackle them step by step and you’ll continue to add bricks to the strong foundation you’re already putting into place.