Should You Have a Separate Business Bank Account?
One of the biggest challenges of starting a business is the financial aspect. You have to keep tabs on all incoming and outgoing transactions, create a balanced budget, and keep a record of everything for when tax season rolls around. And of course, you’re probably already doing that with your personal finances, so now you have double the work!
Even if your business is still in its fledgling stages and you’re not dealing with huge amounts of cash, you still need to create a separate business bank account. Your business and personal finances should never intermingle, for both legal and practical reasons.
Read on to get a picture of why you should always create a separate business bank account right at the outset of your business ventures.
Creates a Clear Picture of Financial Health
Say you’re just starting your small business, and you’ve begun doing business straight out of your personal checking account. You scan through your transactions online, and have to sort through which debits were from personal items and which were from your business. If this were the case, it would be incredibly difficult to gauge exactly how much money you have for your mortgage, and how much is for upcoming business expenses.
You avoid this debacle entirely by having a separate account specifically for business transactions. This way you can see at a glance exactly how well your business is doing, without the risk of accidentally confusing what belongs to your business with what belongs to you.
The Legal Concerns
Beyond just the practical day-to-day ease of having a separate checking account, there are legal matters to consider that make this separation a must.
When a business has a corporation status, it is then a separate legal entity from you. This means that in the event that something happens to your business, you are not held personally responsible. However, if your personal finances are interwoven with those of your business, it makes it hard to determine whether you are truly separate from the corporation, and you personally, not your business, can be held responsible if legal action is brought against you for any reason.
Accounting and Tax Reasons
Tax season is no one’s favorite time of the year, but you certainly don’t need to make it any harder than it already is. When it comes time to file with the IRS, having a separate account of all your business transactions makes it so you don’t have to sort through your whole year’s worth of expenses to see which were personal and which were business-related.
Additionally, should your business receive an IRS audit, you’ll have no trouble finding all of the necessary records in one place, and there won’t be as much skepticism over each transaction and determining whether they are valid business expenses.
If there is no question regarding the distinct, separate nature of your small business, then your business credit score will not bleed over and start affecting your personal credit. However, when a business account has your name and social security number attached to it, there is liability on your part for business debts you may incur.
If your business should take a turn for the worse, it’s an advantage to keep your own personal credit high in case you need to take out a personal loan to help keep the business going, but this may be difficult if your credit score has taken a plummet. Keeping distinct accounts can help reduce these risks and keep your scores clean.
People in general tend to be skeptical of working with someone that they find unprofessional. You may find it challenging to retain clients or do business with other companies or banks if your business has any whiff of impropriety or amateur. When you cut a check with your own name on it, it raises questions and concerns that are best laid to rest before they even arise. Starting a separate business checking account is your first step to achieving a clean, professional company that others look forward to when engaging in business with.
Avoid Gray Areas
When people start their business from home, they are required to declare their deductibles which includes the business space used in the house or apartment. Business owners include online shops, bloggers, third party service providers, etc. As a legitimate business, it is best to have a separate account for the business expenses that you need to declare.
For example, if you are using electricity, paying internet fiber connections, or using your car to run errands for your business, those count as business expenses. If they come from your personal account, the IRS may audit you and penalize you for not labeling business and personal expenses properly. You do use your internet connection to browse Facebook, right? That’s personal. But when you confirm an order, that’s business. Make sure it’s labeled that way or separated through personal and business bank accounts.
Alternate Route if Your Don’t Want to Open a Separate Account
If you cannot afford or are just not interested in the argument above, the best way you can avoid getting penalized for not separating your accounts is by doing the following:
- Pay with checks always.
- If you pay using cash, you risk putting in some missing links in your next tax audit. Why didn’t you pay this month, they’ll ask. Because you got lazy and decided to use your wallet instead? That is not going to fly with the tax guys.
- Use spreadsheets to log the details of your transactions
- It may seem like a hassle, but the IRS likes data. A clean data sheet with all your receipts, bank transactions, and check deposits and withdrawals will account for everything that goes into your business.
- Use an accounting app
- Use an app to upload your spreadsheet and let it prepare all the necessary reports, as well as suggestions on how you can have better financial health.
The best way to avoid distrust and legal trouble is to keep your business dealings separate from your personal accounts. Tracking every transaction is a must, but a separate business checking account is the way to go if you want to eliminate everything from minor hassles to major financial ordeals.
Marc Prosser is the co-founder of Marc Waring Ventures, which operates websites related to financial services and small business. Previously, Marc Prosser was the first employee and Chief Marketing Officer at a brokerage firm, which went public on the New York Stock Exchange. He spent over ten years in the role of CMO, where he was a pioneer in the fields of customer relationship management (CRM), search engine marketing, and email marketing.Read Full Bio