Whether you are working on your business part-time, operating as a sole proprietor, or starting a business with a more formal structure (such as a partnership or corporation) – it’s vital that you keep your business banking separate from your personal finances.
Keeping the two separate not only provides your business with credibility, it reduces your personal liability (a must if you are incorporating your business as a distinct and separate legal entity under its own name) and helps you to manage your taxes, bills, and other payments.
Below are some reasons why you might want to consider a business bank account and information about how to go about finding the right one for you. If you aren’t convinced that you need to separate your business and personal banking, consider the following reasons:
- It Keeps Your Books in Order and the Tax Man from Your Door – From a recordkeeping and cash flow standpoint, co-mingling your finances can quickly become sticky, even for freelancers and part-time business owners. It is a risk most business owners or start-ups cannot afford to take!
For one thing, IRS recordkeeping requirements for income and tax deductions require that business and personal transactions be kept separate. While the IRS doesn’t require that you maintain a separate bank account for your business, it does require accurate record keeping – and keeping things separate makes it a lot easier to provide a clear audit trail.
- It is a Must that You Maintain a Separate Business Banking Account – If your business is incorporated or you have intentions of incorporating, there is no choice in the matter since you are operating a separate tax-paying entity.
o Save on Accounting Costs – Rifling through the line-by-line items in a year’s worth of bank statements can also be a headache come tax time; if you use an accountant, it will cost you more in the long run if he or she has to rummage through your messy recordkeeping.
o Streamline Your Tax Payments – If you make or plan on making quarterly estimated tax payments to the IRS and your state treasury, it is always useful to have a set-aside business bank account where a percentage of each paycheck is deposited to ensure that your tax obligations are covered. This way, when it comes time for making payments, you are not scrambling with your personal finances to cover your taxes. This is particularly important for sole proprietors and independent contractors who operate under their own business names.
Even if you don’t set up a formal business account, at least maintain a separate online bank account where tax payments can easily be transferred from one bank account to another.
o Give Your Business a Professional Image – Another reason, albeit superficial, why you should have a business bank account, is that when it comes to writing checks and paying bills, it will give your business more credibility and also save you plenty of headaches.
Even if your business is registered under a “doing business as” (DBA) name, such as “Creative Web Concepts,” clients will still be using your personal name when making payments unless a bank account with your business name is set up for that purpose.
This can often catch-out accounting departments which have invoices in hand from “Creative Web Concepts” but must make checks payable to a separate individual. This can affect your ability to be paid accurately and on time. It can even attach a part-time/lack of professionalism tag to your business.