Why Your Business Needs a Separate Bank Account

Why You Need a Business Checking Account
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You want to start your small business simply at the lowest cost. That's good. But before you decide to save money by not setting up a business bank account, consider these reasons why you should get that account.

Before we discuss the question of business bank accounts, remember that you must keep your business and personal financial transactions separate. You will have to report your business transactions in a separate form from you personal tax information.

Many small businesses want to save the cost of a business account fees. But consider these reasons why you need a separate business bank account:

Most banks require a separate account for business transactions. If you are starting an LLC, partnership, or corporation, your bank won't let you put business transactions into your personal account. These business types are totally separate from you personally.

If you don't separate business and personal expenses, you can be personally liable for the actions of the business, and not just in financial transactions.

if you want to apply for a business loan, no matter what legal business type you have or where you get the loan from, you will need a business bank account.

You want to look like a real business. It's important to start out the way you want to go, and having a business bank account, with a business credit card, can make you look more professional in the eyes of customers, vendors, and other professionals.

You need a business account to accept credit cards. You need a bank (merchant) to accept bank card transactions on sales, so you'll have to get that business bank account first. If you have a retail business, you'll definitely need that business bank account for your point of sale system.

Make sure the IRS sees you as a legitimate business. You have probably heard that you have to make a profit in the first few years when you are starting your business. That's not strictly true; there are a number of factors the IRS looks at. But one important factor is the appearance that you are a separate 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-breeding business), separating your business from your personal finances can increase your business credibility.

Let's say you have a business selling your artwork. It might take you several years to sell enough artwork to be profitable. If you combine your business and personal expenses in your personal checking account, it will be more difficult for you to justify that your business isn't a just a hobby. Read this IRS Article "Business or Hobby?" for more information.

If you still aren't convinced you need a separate business bank account, ask yourself: Can I really keep all of those business and personal transactions separate?

The One Case When You Might Not Need a Separate Account

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, you might not have to keep business and personal transactions separate in the bank account.

But you still must keep all of those business and personal expenses separate for tax purposes. You will need to have a way to list all your business income and expenses. You will want to take these business expenses as deductions on our Schedule C (business tax report) on your personal tax form.

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 You Have a a 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. 

Using a Personal Accounting System for Both Home and Business Accounts

Maybe you aren't convinced by the arguments for having a separate business bank account. Or maybe you've read some opinions, like that of June Walker, who says you don't need a separate business checking account. In fact, she says it's easier without it. She's talking about a sole-owner business that is operating as a sole proprietor and who doesn't need a bank loan or credit card processing.

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. 

In conclusion: If your business is a simple sole proprietorship, you may be able to continue to keep just one checking account. 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: This discussion is only a general overview. It is not intended to be tax or legal advice. Every business is unique, so it's always a good idea to talk to your tax professional or financial advisor before you make business decisions.