Why you should keep business banking separate from personal banking
One of the common business finance mistakes that inexperienced business owners make is not separating their business and personal banking. This often happens when businesses start as home based or very small businesses and their owners don't see the need to separate the banking for their business. They think that the convenience of just using their personal banking outweighs the hassle of setting up business banking. This is never a good idea. Keeping your business and personal banking tied together can create much larger problems as your business grows.
Business finance experts recommend that you actually keep your personal and business money separate and in different accounts. Many times business owners will even do their business banking at a different bank in order to avoid any mix up between personal and business funds. Keep in mind that while this seems daunting it is actually quite easy with the use of online banking. Here is why you should keep business banking separate from personal banking-
- Better bookkeeping-You want to make sure that the bookkeeping that you do for your business is as effective as possible. If you do not separate your business and personal banking it becomes more and more difficult to do effective bookkeeping for your business. If your personal and business finances are mixed it becomes a time consuming task to sort them out especially at tax time. The reality is that this becomes a mess that no one wants to take care of it. If you have separate business banking then you have an already prepared financial record to hand over to your accountant at the end of the year. All you will need to do is match up your checkbook and bank statements to your invoices and receipts and you will be ready to file your business taxes.
- Professionalism-Having a business bank account(s) shows the IRS that you are not running a hobby but rather a true business. This is an important step in showing that you are tying to make a profit. Failing to take the proper steps to establish a professional business could invite an audit. Along with having separate business bank accounts, you should also have business cards and a well maintained set of business books. Also, any checks that you send the IRS should come from your business account. In addition, along with showing professionalism to the IRS you are also presenting a more professional image to customers, vendors, and key contacts you work with by having separate business banking. You want anyone who receives a check from you to see that it comes from an ongoing business concern.
- Legalities-The bottom line is that if your business is incorporated you will be required to have a separate business account. Keep in mind that it does not make a difference as to what legal entity your business is registered as. You must have a separate business account if your business is incorporated. In addition, your business banking serves as a legal form for recordkeeping if the IRS or any other government agency needs to see your records. While no one wants to be audited being able to present this type of bookkeeping versus a mish mash of personal and business banking can help your case if you have legal issues under scrutiny. Finally, should the worst happen and your business fails having your personal and business banking separate can help to protect your personal assets during a business bankruptcy. Failing to separate your business and personal banking during a bankruptcy proceeding could mean that you are not afforded all the protection that you are entitled to.