It’s not personal, it’s just business.
If you own a business or are in the process of starting one, it’s time to stop using your personal bank account for business transactions. Having a dedicated business bank account is an important part of establishing a company for many reasons. Not only is it easier to keep track of business expenses, but keeping your personal and business accounts separate can protect you legally, while safeguarding your identity.
One of the first steps when launching a business should be to open a business checking account, yet all too often, business owners make the mistake of mingling their finances. Here’s why having a clear separation of accounts can streamline your business, protect your assets, and establish credibility.
How to Keep Track of Business Expenses
We all know how important it is to keep your books tidy. Having a separate business account means your business expenses are easily accessible in one spot, and you won’t have to sift through your personal transactions to pull out company-related ones. When it comes down to how to keep track of business expenses (and do it well), this separation is especially helpful in today’s world, where an app can keep track of all of your expenses in one place! Every purchase that appears on your statement should be associated with the business, so there’s nothing extra to sort through.
This is especially important come tax time. Taxes are complicated, and as your business grows, they’ll only get more difficult. Keeping everything in one place throughout the year means that, come tax season, you’ll be less stressed and more prepared to file – or even just more prepared to hand it all over to your accountant.
While it will be easier to do your taxes, having a business account may help keep the IRS off your back, too. The agency is notorious for having strict rules about a lot of things, and what can and can’t be deducted as a business expense – especially for people that work from home – is one of those things. So, if your business expenses are mingled with your personal ones, certain deductions might be deemed problematic, even if they are legitimate business expenses. But if everything is tied to a business account instead, your expenses are less likely to raise eyebrows.
How a Business Account Can Provide Legal Protection
The major benefit of having a corporation or LLC is the legal liability protection it provides. It defines your business as a separate entity from you, the individual, in any case of legal action. When you have a business bank account, the protection extends to this, too. However, if your business gets sued and your personal accounts are wrapped up in the corporation, the court has grounds to go after you as an individual, in addition to your company.
Another scenario where this protection applies could be if the business fails. If, for whatever reason, your business closes and your accounts are intertwined, you could be personally liable for any debts incurred by the business.
Protection doesn’t end there! Having a business account can help safeguard your personal identity, too. Running a business typically means you have to make frequent and often large purchases. The more transactions you run up on your personal card, the greater the risk for fraud. With a dedicated business account, you can keep your personal monies safe should any issues arise.
How a Business Bank Account Can Help Build Credibility
Let’s face it – It’s just not professional to write personal checks to pay business expenses. Company checks help build credibility and establish your entity as a legitimate business. A business checking account can also lend credibility in the eyes of the IRS.
It might sound overwhelming – especially if you’re in the process of transitioning from a personal account to a business account – but completing this crucial step will benefit you and your business in the long run, keeping you safe, organized, and secure. We also recommend having separate personal and business credit cards for these reasons, too.
It’s a bank account that’s in the name of your company. One of the critical things to running your business is having a separate business and personal bank account – or what Matthew May calls “the separation of church and state” in the business realm. (Start at 3:00 in the video.)
For starters, ideally, your bank account should be in the name of your business. You’ll need an Employer Identification Number (EIN) to set up a bank account with that name.
If you’re deciding on legal entities, that is an entirely different topic that we defer to lawyers. The best advice we’ve received is to stick to an LLC until you have a good reason to move to another type of entity.
But whatever you do, start the separation of business and personal bank accounts as soon as possible.
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