Business owners may opt for different banks for their business and personal accounts or choose one bank that offers competitive accounts for both. Below are some reasons to keep your business funds separate from your personal cash.
Clean and Accurate Bookkeeping
You want to start your small business simply at the lowest cost. That’s good. Before you decide to save money by not setting up a business bank account, consider the time and energy that keeping them together will cost you at tax time. Imagine your checkbook. Now imagine the volume of your bank statement if you chose to mix your business and personal transactions. Now imagine the number of entries you’ll create over your first year of business. If your business grows in the years that follow, the complexity and volume of your transactions can’t help but grow with it. You must be prepared to document and delineate all of these transactions in great detail during tax season each year, and if you mix personal and business finances, this process will be much more time consuming.
Proof Your Business Is Not a Hobby
If you’re running a business from home, it’s crucial to keep business and personal expenses separate. You should take a deduction for your home business space, but you’ll need to know detailed office expenses versus home expenses to make your write-off calculations. The Internal Revenue Service is picky about proving your business is in fact a business and not a hobby. Basically, you have to show a profit on Federal Tax Form Schedule C three years out of every five. If you have losses that you deduct from your income three consecutive years, the IRS may decide you’re conducting a “hobby business.” Even if you pass the “3 out of 5” rule, you’re not necessarily safe from an IRS audit. You can further prove you’re a business, and not a hobby business, if you have a separate business bank account and a well-maintained set of business books.
Separate Entities Must Have Separate Accounting
If your business is a separate entity, such as an LLC or a corporation, the IRS requires that you keep separate accounting and bookkeeping records, and a business bank account facilitates that. It doesn’t matter if your business is a corporation or a partnership, or an incorporated sole proprietorship. If you’re incorporated, you must have a separate bookkeeping system. When a business incorporates, it becomes its own legal entity and is set apart from the individual (or individuals) who founded the business.
Provides a Clear Audit Trail for the IRS
You personally may never be audited by the IRS, but unfortunately for your business, it’s always a possibility. When an audit does take place, it’s really not that big of a deal—so long as you have clean record keeping through separate bank accounts. You need to be sure and keep all your invoices and expense receipts as backup material. If you mix your personal and business finances in one bank account, an audit by the IRS could turn into a nightmare.
Demonstrates Professionalism
You’ll need a bank (merchant) to accept bank card transactions on your sales, which means you’ll have to get a business bank account. If you have a retail business, you’ll also need a business bank account for your point of sale system. You always want your business to maintain a professional demeanor. If you keep your business finances separate from your personal finances, it demonstrates your underlying dedication to professionalism and organization. This means that when you write checks to suppliers, they see that the checks are coming from a business—and the IRS sees this, as well. Furthermore, if you don’t separate business and personal expenses, you can be personally liable for the actions of the business (and not just in financial transactions).
The One Case You Might Not Need a Separate Account
A sole proprietorship is not a separate legal entity. It refers to a person who owns the business and is personally responsible for its debts. If you’re a sole proprietor and you combine business and personal expenses, you may not feel the need to keep business and personal transactions separate with bank accounts. You must still keep all of those business and personal expenses separate for tax purposes. You will want to take your business expenses as deductions on your Schedule C (business tax report) on your personal tax form. A sole proprietor can keep just one checking account as long as he or she makes certain that business and personal expenses are correctly labeled.
