Using Credit Cards in Business

Because the Truth in Lending Act exempts businesses from the protections that consumer credit cards get under Credit Card Accountability Responsibility and Disclosure Act (CARD) of 2009 -- many small businesses may be using a personal credit card for business purchases and working capital. One reason they do this to avoid the pitfalls of a business credit card.

Separating the Personal from the Business

Limiting the number of credit cards you have is a good move, but you still need to at least two credit cards: one for business purchases and one for personal purchases. Using one card for everything can lead to the IRS asking about your personal purchases. Yes, this in spite of paying for them with cash from your personal account.

In the beginning when people start a business, they fund it with their own money. That's the first step in blurring the lines between business and personal finances. At this stage, they may be sole proprietors, and this group isn't required to have an official business account. Regardless, it's better to get one as soon as possible to avoid future problems. Corporations, partnerships, LLCs, and LLPs must have official business accounts.

Reconciling Bank Accounts and Credit Cards

Financial management software or web-based finance applications can't simplify reconciling and managing your bank account and credit card when you mix business and personal transactions. For example, a business owner uses a consumer credit card for business and personal purchases. When the statement arrives, the owner needs to figure out which is personal and which is business. It's easy to make a mistake.

If the owner has two separate bank accounts, then the owner pays two times for a single credit card. One payment comes from the business account to cover business-related transactions. The other from the personal account for personal transactions.

In the case of having only one bank account for everything and not having to distinguish purchases, that's out of the question. Businesses need to have a bank account devoted to the business. What's more is that you'll have to justify your business purchases to the IRS, which is tough to do when you use one credit card for all purchases. Having two accounts and credit cards simplifies this.

Reconciling two bank accounts and two credit cards is much easier. Yes, you have to reconcile each account and pay twice, but you won't spend so much time identifying business and personal purchases, or calculating how much you owe for each.

Credit Cards for Employees

As you grow your business, you may reach a point where employees need to have credit cards. Credit card companies can send reports breaking out spending by employee credit card. You can also get reports from credit card companies for the accountant.

What are the advantages of having separate business and personal accounts? What have you learned about managing bank accounts and credit cards? What advice would you give to someone starting a new business?