This topic is something that has been swirling in me head for a long time. More recently I have talked to sooo many business owners that are confused by this topic so I dove in and finally wrote this post.
When my husband and I started our very first business, we were pretty clueless. He was tutoring kids in their homes, while going to grad school for a Master's in Education. We knew we were going to be honest and claim the income, but that was as “organized” as we got. It wasn't until tax time that I realized what a mess it was to try to compile his income and expenses based off our personal bank statements. How was I supposed to decipher what was personal and what was business? I saved a few receipts and occasionally made copies of the his deposits, but nothing consistent. We didn't use any sort of accounting software so that couldn't even help. So you can see that I learned this lesson the “hard” way.
Now that I run Whaley Bookkeeping & Tax I have a dedicated business bank account, and have had it since the beginning (give or take a month). It has been such an asset to my business and I'm very glad I did it early!
But the big question is why? Well, there are a few reasons why you should have a separate business bank account.
1) It makes your life easier!
Remember that story above about sorting through a year's worth of bank statements to try and figure out what was business? Yeah, that sucks. It was only slightly easier because it was a very simple side business (and I am a master transaction sleuth). If all your business transactions are running through a separate bank account then organizing income and expenses is going to be so much easier!
2) It makes the IRS Happy.
In a similar vein as #1, because your transactions are easy to track you will be able to substantiate them for the IRS if necessary.
“IRS record-keeping requirements for income and tax deductions require that business and personal transactions are separate. While the IRS does'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.” Caron Beesley, U.S. Small Business Administration
3) It reflects a professional image.
You're serious about building a business right? You want people to see that you are a professional and having a separate bank account is one of those steps.
4) It allows you to receive payments in your business name.
Even if you have registered a DBA and are operating under a fictitious business name, you cannot accept payments in those names until you open a business bank account and give the bank a copy of your DBA.
5) If you are an LLC, Partnership, S-Corp, C-Corp, Etc. It is required.
If you've jumped from Sole-Proprietor to an incorporated business entity you are required to have separate accounts because your business is a completely separate tax entity as well.
I hope this both informs and inspires you to take your business to the next level this year! Keep an eye out for more Biz tips and Tax Tips in the near future!