When you start a business, one of your first tasks should be to open abusiness bank account. It's important to keep your business depositing and spending separate from your personal banking and it's not enough to simply keep separate records.
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.
Key Takeaways
- A business bank account is an important first step for a business.
- A separate bank account for your business makes it easy keep business and personal finances separate and distinct.
- Small businesses with their own bank accounts demonstrate professionalism.
- While sole proprietors aren't required to maintain a separate business bank account, it's still a good idea.
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.
Note
If you have a separate account for your business transactions, you have a clean record to give your accountant at the end of the year. Remember to keep all your invoices and receipts to match your checkbook and bank statement entries, and you'll be in better shape when tax time rolls around.
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 adeduction 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.
Note
Generally, if you want to apply for a business loan, no matter what legal business type you have or where you get the loan from, you will most likely need a business bank account.
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) toaccept bank card transactionson 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 yourpoint 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 bepersonally liablefor the actions of the business (and not just in financial transactions).
The One Case You Might Not Need a Separate Account
A sole proprietorshipis 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 youcombine 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 yourbusiness expensesas 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.
Frequently Asked Questions (FAQs)
What do I need to open a business bank account?
After you've chosen a bank and the type of accounts you want to open, you'll need to provide the bank with a few documents. These will vary by bank, but typically you'll need to provide an employer identification number or EIN (or your Social Security number if you're a sole proprietor), you're business's formation agreements, your business license, and your ownership agreements.
How do I open a business bank account?
Opening a business bank is not that different from opening a personal bank account. After you find a bank that offers accounts with rates and terms you like, you'll provide the bank with some documentation, such as an employer identification number, and your business's formation documents. And you'll have to provide funds to deposit in your new account.
