If business finance is uncharted territory for you, there are a lot of things that you should know and study. Among the first things that you should do is to keep your personal finances separate from your business finances. It’s normal that as you start, you cover almost every expense using your personal funds from your personal bank account. However, you should grow out of this practice as soon as you can. Aside from ease of review, there are more practical reasons why you should do this.
- Easier monitoring
This is one of the first reasons why your personal and business finances should never commingle. If you are reviewing a transaction or trying to track your expenses, it would be harder if you have to filter every transaction in your bank statement.
Just one look at your business account will give you an idea of where you stand financially. Instead of having to go dig through your personal bank transactions, opening a bank account for your business is the path that will give you less headache.
- Taxes and legal requirements
Beyond the ease of monitoring cash flow, another reason to keep things separate is taxes. When it’s finally time to file your taxes, it would be smoother if you have a ledger of business-only transactions. Remember that when it comes to filing, you have to take into account all expenses you made for the business. All transactions including operational costs and office expenses must be presented together with proof such as receipts.
It is common for most small businesses to stem from a personal hobby. However, as far as the Internal Revenue Service (IRS) is concerned, you have to prove that you are not running a hobby business. Usually, a no-show of profit for three out of five years will invite an audit from the IRS. To help you prove that you are indeed running a business, a separate business bank account is a must.
As a sole proprietor, you are not required to have a separate business bank account. However, since you are to pay estimated taxes quarterly, the IRS recommends your get one for tax simplification.
At the same time, for bigger businesses, you will save yourself from an annoyed accountant when you have a clear record of all your payables and receivables. The plus is your accountant will thank you and they will not charge you more.
- Business perks
When you have a business bank account, you get access to perks that will improve your service to customers. You will be allowed to accept credit card payments and use a point of sales system if you have a business bank account. This will also be helpful especially if you are in e-commerce.
At the same time, it contributes to your professionalism if your business name is reflected on the checks you write to your suppliers. And just like when you apply for any type of auto or personal loan, the creditor will peruse your financial statements to gauge whether you can get the green light or not. When you apply for a business loan, you can only get approved if you have a business bank account.
- Protection from liability
There are different types of business structures that give business owners different kinds of benefits, liabilities, and responsibilities. A sole proprietorship is not considered a legal entity and is not required by the IRS to have a separate bank account. It means that if you are a sole proprietor, you are liable for all the debts the business acquires. Your personal assets and your business earnings can commingle. Although, as mentioned above, for tax filing purposes, it’s better to keep them separate.
On the other hand, incorporating means your business is created as a separate entity from you. Limited liability companies (LLC) are separate from their owners. This is a way to protect your personal assets. In case things go south and the LLC can’t pay its debts, creditors can’t go after your personal assets, they can only include assets that are legally declared under the business. What separates the owners from the LLC is called a corporate shield.
However, even with this kind of protection in place, you may still put your personal assets at risk especially if you cannot delineate your personal assets from your business in the form of separate bank accounts.
You will be required to produce more documents for a business bank account than for a personal one. However, the perks that it will afford you will be all worth it.