Why Your Business Needs a Separate Checking Account
I have found differences of opinion from tax professionals in the blogosphere on this subject.
June Walker says you don't need a separate business checking account. In fact, she says it's easier without it.
The Wandering Tax Pro Robert Flach says you do need a business checking account.
So who is right?
Why You Do Need a Separate Business Checking Account
No matter what legal structure your business has, Robert Flack quotes several tax and legal authorities who say you should have a business checking account.
June Walker is talking about independent professionals who are working as sole proprietors, but even in this situation you may be tempting fate (and an IRS audit) by not keeping business and personal expenses and income separate.
Using a Personal Accounting System for Both Home and Business Accounts
Some online accounting software programs have the ability to track both business and personal expenses in one account. For example, Quicken allows you to track business and personal income and expenses separately from one checking account. You can categorize income and expenses as either business (and tax) related or personal (tax and non-tax) related.
But it takes some setup time and concentration to make sure you keep the recordkeeping system going every month so you don't have to figure things out and separate the income and expenses at the end of the year, If you can do that, it might be possible to use the same checking account for business and personal.
If Your Business Is a Sole Proprietorship
A sole proprietorship is a business entity that is not separate from the owner. If you are a sole proprietor and you combine business and personal expenses, it can be difficult for the IRS to determine if you really are in business.
But that doesn't mean that the sole prop doesn't have to keep business and personal expenses separate.
If a sole proprietorship chooses to keep business and personal records in one checking account, that is not a huge problem, as long as there is a record of all business expenses which are being claimed as tax deductions for the business, and as long as no personal expenses are mislabeled as business expenses.
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.
If Your Business Is an LLC, Partnership, or Corporation
For these business entities, particularly for corporations, there is the added concern about keeping company and personal business totally separate. These business entities are, by their nature, totally separate entities for financial purposes.
Failure to separate business and personal expenses by combining checking accounts can result in the owner being sued for liabilities of the business and for the owner being responsible for corporate liabilities.
Don't Forget the Issue of the Hobby Business
In the case of a business which loses money in the start-up phase, and which could be considered a hobby (like a craft business or horse business), the separation of personal and business checking can help increase the credibility of this effort as a business, not just a hobby.
Let's say you have a business selling your artwork. It might take you more than a year to sell enough artwork to be profitable. If you combine your business and personal expenses in your personal checking account, it will be difficult to pull out the business expenses.
Read this IRS Article "Business or Hobby?" for more information.
...And What About the Home Based Business?
If you are running your business from home, it's even more difficult - and more important - to keep your business and personal expenses separate.
At tax time, you will probably want to take a deduction for your home business space. At that point, you'll need to pull in just a few of your home expenses to make that calculation. But not all of them, and not 100% of those expenses. It's far better - and easier - to take the business expenses from the business checking account and add the home expenses for the home deduction.
If your business is a sole proprietorship, you can probably continue to keep just one checking account if you wish, but just make sure that business and personal expenses and income are labeled and that no personal expenses are claimed as business expenses.
For all other types of business entities, get a separate business checking account.
Disclaimer: I am not a CPA, attorney, or enrolled tax preparer. My purpose is to provide you with general information and suggestions, but your situation may vary from the ones presented here. Before you make any tax or accounting decisions, talk with your CPA or tax professional.