One of the very first things I make sure to discuss when onboarding a new client, is whether or not their personal and business finances are separate. If the answer is a no, I strongly recommend that they make the change.
Like that day. As soon as possible. Make it a priority.
I’m going to suggest the same for you too!
Now, you might be wondering to yourself if this advice still applies to you if you are one of the few that is just phenomenal at remembering to keep a record of your expenses.
Want to know my answer?
Yes, yes. The answer is still a big huge YES!
Here are some reasons it’s so important (in no particular order):
Your bookkeeping becomes 10x easier when you’re not commingling funds.
Honestly. No exaggeration there.
When you know that everything in your bank account is actually business related you are avoiding SO MUCH unnecessary stress.
On the other hand, if you have your funds mixed, tax season becomes a huge project. And let’s be real, tax season is stressful enough without adding in an unnecessary project like sifting through your bank transactions to figure out what what business related.
Combing through transactions and trying to remember what was business and what was personal is NOT fun. You’re making yourself do more work than needed by not keeping your funds separated.
Save yourself the headache! Instead, spend a few minutes opening a business checking account now. That way you don’t have hours sorting through your jumbled up finances come tax season. I’m sure you have better things to do with your time!
Even if you track things well, you are still missing out on benefits of having separate accounts. When you have an account meant just for business purposes, you have…
Plus, it’s much easier to keep track of exactly what you’re spending and what you’re bringing in when all your business expenses and income are funneled separately into their own account.
Clear Audit Trail
Let’s talk auditing. It isn’t fun, but it is necessary. The IRS conducts these to check for accuracy between what a business reports and what they actually are bringing in and spending. If things don’t look like they are adding up, they’ll dig deeper to find any discrepancies.
You aren’t legally required to follow a specific method for record keeping, but you do want to have a good one set in place. The more accurate and complete it is, the better. This is where having a separate bank account comes in handy. When you have an account that is used only for business related purchases and expenses, it makes things so much easier. Your bank statement will show your income and deductions clearly. Without it, your audit trail is limited. (AKA it will take more time and more digging).
Another thing to keep in mind is that having a business checking account helps your business look less like a hobby and more like a legitimate business. Because the IRS will only let you deduct business related expenses, this is kind of a BIG DEAL.
You don’t just automatically qualify as a business because you say you are. There are certain guidelines the IRS has put out to determine the difference between a business and a hobby. When you have your expenses going through your personal account, you might be giving off the impression that this business you’ve worked so hard for, is merely a hobby. (And remember, hobbies don’t qualify for deductions on your taxes).
So, if you are audited, not only will you need to prove expenses, you will also need to convince the government that you are operating a legitimate business. If you have a separate business account, they’ll simply request bank statements and receipts. Not all this other mumble jumble.
If you commingle funds, you’re probably overlooking expenses. There are so many transactions on your account it can be hard to tell the difference between personal expenses and business ones. While some may be obvious, like a specific vendor that you only use for business related items, others are easy to overlook.
For example, do you remember which Walmart, Target, and Amazon transactions were for business or do you just skip over those?
How about your business meals, like the food you purchased on a business trip?
All those little expenses add up to tax savings! Don’t miss out on these deductions that you’re entitled to because you don’t have clear records.
The marketing and promotional aspects of having a legitimate business includes having a separate bank account.
Think of this way. When it comes time for your clients to pay you, who are you going to tell them to write the check out to? Asking them to write the check out to you personally, lacks professionalism. It will signal to them that you’re not a serious business owner and may make them reconsider working with you in the future.
Your clients will be much more inclined to trust the legitimacy of your business if your payments are linked to an account under your business name.
Here’s more food for thought: You can’t be telling people to make a check out to you personally and then also expect them to treat you like the CEO you are. Treat your business like a business and your clients will treat it that way too. But remember, it has to start with you!
Along that same note, if you aren’t treating your business like a business, why should the government?
If you are an LLC or a Corporation, you legally HAVE to treat your business as a separate entity.
Keep your personal and business assets separate. If you don’t, it’s called “piercing the veil” and your LLC protection becomes illegitimate. Yikes.
It may be against your bank’s policies to use your personal account for business use.
Each bank has its own policies in regards to how accounts can be used. But for the most part, if you set up a personal account, you agreed to use it for personal use.
It’s important for you and your business to abide by bank terms and conditions otherwise, there is a risk that your account could be closed altogether. Yikes!
Did you know that you HAVE to have a business bank account to qualify for loans or grants? Yeah, all that government stimulus money being offered right now can’t be deposited to your personal account. Sorry!
Additionally, business bank accounts can be used to verify the legitimacy of your business when it comes time to apply for a business credit card or a business loan.
I hope the takeaway from this was loud and clear! But just for fun, let me repeat myself: DO NOT COMMINGLE FUNDS!
So, it you haven’t already, go open a business checking and savings. Like, right now! Go!
The best part? A lot of banks let you do it 100% online, so you can do it from the comfort of your couch!
If your current bank isn’t set up to process online account applications I’d encourage you to check out Azlo. They are 100% online and offer business checking and saving accounts with NO fees. (Though I should add, fees aren’t terrible because they are tax deductible. Still nice to avoid them if you can though, right?)
For you rockstar entrepreneurs who already checked this money making move off your to do list, have you opened a business credit card?!
P.S. For any of you small business owners who love your bank and want to brag about them, tell me who you bank with! No seriously, I want to know! I’m always being asked for bank recommendations and I want some honest opinions given by other entrepreneurs. So don’t be shy. Please share!