One of the first things you should do when starting a new business is to open a bank account for your business. Keep your business banking separate from your personal bank account. It is not enough to just keep separate records.
Business owners can choose to use different banks for business and personal accounts, or they can choose a bank with competitive accounts for both. Here are some reasons why you should keep your business money separate from your personal money.
The Key Takeaways
- The first step in starting a business is to open a bank account.
- Keeping your personal and business finances separate is easy with a separate business bank account.
- Professionalism is demonstrated by small businesses that have their own bank account.
- It’s a good idea to have a separate bank account for your business, even though it’s not required.
Accurate and Clean Bookkeeping
You’re looking to launch your business at the lowest possible cost. That’s good. Consider the cost of time and effort involved in keeping your business accounts together at tax time before you decide not to set up a bank account.
Imagine your checkbook. Imagine the size of your bank account statement if your personal and business transactions were combined. Imagine the number of transactions you will create in your first year as a business.
The complexity and volume will increase as your business grows. It is important to be prepared for tax season, when you must document and detail all these transactions. This process can be time-consuming if your personal and business finances are mixed.
Note:
You can give your accountant a clean account at the end the year if you keep a separate business account. Keep all receipts and invoices in order to reconcile your bank statements and checkbook entries. You’ll be better prepared for tax season.
Proof That Your Business is Not a Hobby
You should take a deduction for your home business space. However, you will need to know the details of office expenses versus home expenses in order to make your calculations. You can deduct for the home office. However, you will need to calculate to write off your expenses.
Internal Revenue Service (IRS) is very picky when it comes to proving that your business is a real business and not just a hobby. You must show profit in Federal Tax Form Schedule C for three out of five years.
The IRS could decide that you are running a ” Hobby Business” if you have three years of losses you deduct. ” “ If you meet the “3 out 5 rule”, you may still be audited by the IRS. If you maintain a separate bank account for your business and have well-maintained business books, you can prove that you are a real business and not just a hobby.
Separate Entities must have separate accounting
1 Doesn’t matter whether your business is an LLC, a corporation, or an incorporated sole proprietorship. You must use a separate accounting system if you are incorporated. When a company incorporates, the legal entity is separated from the founder (or founders).
Note:
You will need a bank account for your business if you are planning to apply for any type of business loan.
It provides a clear audit trail for the IRS
It’s possible that you will never be audited personally by the IRS. However, for your business it is always possible. If you’re audited, it isn’t a big deal as long as your records are clean and separate bank accounts.
Keep all receipts and invoices for your business and personal expenses as a backup. An audit by the IRS can be a nightmare if you combine your personal and business financials in one account.
Shows Professionalism
A business bank account is required to accept card payments for your sales. You’ll need a business account if you run a retail store.
Your business should always maintain a professional image. It shows your dedication to professionalism and organisation if you separate your business finances from your personal finances. When you send checks from your business to suppliers, the IRS will also see this.
You can also be personally responsible for business actions (not just financial transactions) if you do not separate your business expenses from personal ones.
In One Case, You May Not Need to Have a Separate Account
A sole ownership does not constitute a separate legal entity. The sole proprietor is the person who owns and runs the business. He or she is also personally liable for any debts. You may not need separate bank accounts for business and private transactions if you are a sole owner and combine your business and personal expenses.
For tax purposes, you must keep your business and personal expenses apart. Your business expense will be deducted from your personal tax return on Schedule C (business tax statement).
As long as the sole proprietor labels his or her business and personal expenditures correctly, he/she can have only one checking account.
FAQs (Frequently Asked Questions)
What is required to open a bank account for my business?
You’ll have to give the bank a few documents after you choose a bank. You’ll have to supply different documents depending on the bank. Typically, you’ll be required to submit your EIN or employer identification number (or your Social Security Number if you are a sole proprietor), your business license and ownership agreements.
How do I set up a business account with a bank?
It is very similar to opening a personal account. Once you have found a bank offering rates and terms that you are happy with, you will need to provide them with certain documentation. This includes your employer identification number and the documents establishing your business.
You’ll need to deposit funds into your new account.
