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Should I Have a Separate Credit Card for My Business?

by | May 5, 2022 | General Counsel

Should you have a separate credit card for your business? I can’t tell you how many clients have been asking me this question. The short answer is yes, you should absolutely have a separate credit card for your business.

After all, separating your personal finances from those of your business is one of the primary reasons for forming a legal business entity in the first place. The real question is why should you have a separate credit card for your business?

I’m Neil Fridman with the Fridman Law Firm. Today, I’m going to share some of the primary reasons why you should use a separate credit card for your business. Let’s start with the most obvious reason, which is that using your personal credit card for your business could result in losing your business’s legal protection.

Your business’s legal protection

A legal entity is designed to separate your personal assets from those of your business. The legal term for this protection is called a corporate veil. When you choose to mix your personal and business finances, including the use of credit cards, a court of law could rule that you and your business are a single entity.

Your personal assets could be at risk

In the case of business liabilities, your personal assets could be at risk. You may have heard the phrase piercing the corporate veil. Commingling your personal and business finances through the use of a personal credit card is a prime example of something that could be viewed as piercing the corporate veil, thereby exposing you to a lawsuit personally.

Issues with the IRS

However, being held responsible for the liabilities of your business is only one of the dangers of using your personal credit card for company expenses. It may also draw the attention and scrutiny of the IRS and prompt an audit. If an audit occurs, you will have to prove which expenses were for your business and which were personal.

As you can imagine, sifting through all of your credit card statements and lining each expense up with those reported on your taxes for your business is a tedious process. If you’re unable to satisfy the IRS with your response to an audit, you could face serious penalties that could ultimately be devastating to both your personal and your business finances.

Impact on your credit score

The use of your personal credit card in your business can also have a dramatic effect on your personal credit score. Cash flow in a business is often unpredictable, and carrying business debt on your personal credit card can have a negative impact on your credit score. Paying your credit card bill late or defaulting on your credit card makes up 35% of your credit score, and this is something you can easily avoid by applying for a business credit card.

More benefits of a business credit card

Using a business credit card can also offer some other great benefits. Business credit cards often come with more spending power than personal cards, which can be beneficial if your business has high operating costs or if you need to spend a lot on inventory each month

Using a business credit card will also simplify your bookkeeping, allow you to build your business credit, as well as establish your business credit history. This, in turn, will help you secure financing and negotiate payment terms with vendors and obtain financing from institutional lenders.

What you should do

If you are disciplined in your spending, there’s no downside to obtaining and using a credit card for your business. It will help ensure that your personal finances aren’t exposed to any business liabilities and it will also give your company access to other potential benefits.