When starting up a brand new business, it can be easy to fall into the habit of mingling funds – using your personal checking account to handle both household and business expenses.
Perhaps you’re careful to differentiate business from personal expenses and deposits when you enter line items on your checkbook register, but everything is funneled through a single account.
This might not be in your best interests, even in the short-term. Here’s why:
A business checking account clearly separates a business from a hobby.
Managing a business is no small thing—it’s a serious endeavor with the goal of profitability and growth, which the government supports through tax incentives and deductions.
In contrast, a hobby is typically done for entertainment purposes, even if a modest amount of sales helps the hobby support itself.
To qualify as a business and receive tax benefits, you must be able to show you are serious about your small business in a way that might impact the community or economy, and that it’s far more than a hobby.
The government wants businesses that fuel jobs and economic growth, and stabilize communities–not ones that just pays for the amethyst beads and sterling silver wire in someone’s craft room, or the expensive new computer used to create a website for a friend.
Mingling your business and personal funds can indicate a casual attitude about the business that comes back to hurt you later.
It simplifies doing your taxes.
Mingled checking accounts significantly increases the amount of time spent on recordkeeping. You have to sort through them in great detail, rather than reviewing one streamlined record.
Even if you are very careful to indicate business versus personal in your checkbook register, and keep business receipts and deposit slips in a separate file, it can be a herculean task figuring things out later. You’ll have to review each individual item and it’s far easier to miss important details.
Not only that, sloppy recordkeeping skills or lack of attention to details can make this separation virtually impossible.
One other thing to consider is this: if you are paying an accountant or tax professional to help, figuring out blended accounts will significantly increase their time, which bumps up what you pay for their services. It also gives them access to your personal finances, which can make some people uncomfortable.
Keeping a separate business checking account streamlines this process, and gives you a leg up if you ever become audited. Clear, written records make the process go far more smoothly, providing a clean trail of bank statements that are easy for the auditor to follow.
Business checks are more professional and private.
If you write checks to pay business vendors for their products or services, using a personal check provides them with your home address. If a challenge with funding results in past due payments, this loss of privacy can become a problem.
Sending a personal check also looks less professional. Appearing as credible and professional as possible gives a vendor confidence in your success and ability to pay on time. It also allows others to write checks to the business, instead of you personally, which supports that credibility and impression of success.
Separation provides added legal protection
There is one last benefit of separate business checking accounts that few think of, unless they are sued.
If your business has been set up as an LLC or corporation, you’re provided a certain level of protection because the court system is required to consider legal liabilities of the business separate from that of the individuals involved. This ensures personal assets are likely to be safe, such as a home and savings accounts.
In fact, the very process of setting up your business through a legal entity requires a separate business account if it is a corporation, partnership or incorporated sole proprietorship.
But what if it’s an LLC or an early start-up that hasn’t filed yet? What if you are a freelancer or consultant who doesn’t see the need for setting up an LLC?
Separating your accounts is still important from a legal perspective.
If you mingle your finances, it can allow the court system to pursue your personal assets. The degree of separation between the financial activities of the owner and that of the business can influence whether or not the court finds you personally liable.
The negligible costs of having a business checking account are nothing, compared to the benefits it can provide.
If you’d like to discuss your business, learn more about business checking versus personal checking accounts, or discuss your financial goals, let us know. We’re here to help.
* This article is not intended to provide legal, accounting or tax advice. Please seek appropriate professional support to obtain answers specific to your own situation.