Separate Accounts
Dear Readers,
We frequently see small business owners use their personal bank accounts for their business expenses. Although having two bank accounts appears inconvenient, business owners should have a separate business banking account from their personal banking account. They should not be using their personal piggy banks for their business. The questions we often get asked are: “When is the right time to set up a business bank account and why do I need separate accounts?”
Pedro: Good questions. I agree that many small business owners trying to use a personal checking account for business purposes. Sometimes, they say they just aren’t “big enough” for a separate account. Josh, when do you think a business needs to set up a separate bank account?
Josh: A business should set up a separate bank account the minute it is in business. When a business is big enough to start accepting checks or spending money, then the business should have a separate business banking account. Co-mingling of personal and business funds is never a good idea.
Pedro: I agree. First, a separate business bank account means cleaner and more accurate book keeping for tax purposes. It’s useful to keep your personal and business accounts separate especially for completing your tax returns and claiming expenses that can be offset against the profits made to reduce your tax bill. Secondly, having a business bank account looks more professional to your vendors and signifies to the IRS that you are not just a “hobby business.” If you keep your business finances separate from your personal finances, that helps enhance your image of professionalism. It means that when you write checks to suppliers, they see that those checks are coming from a real on-going business. Ultimately, having a business bank account provides your business with credibility (with both customers and potential creditors.)
Josh: A business should create a separate bank account – as well as a corporate identity- to really prevent any type of liability concerns too. If business and personal funds are mixed up, then you run the risk that your personal funds will be seized by business creditors or unhappy staff or customers in a lawsuit. There are several different types, but setting up a LLC is the most common way to create a wall between business actions and personal funds. A separate account is the critical piece of that wall. It’s not difficult to form a LLC (Limited Liability Corporation). You don’t need a lawyer and there is minimal cost to set up a proper corporate identity.
Pedro: I think the exception to this might be a sole proprietorship where the business entity is not separate from the business owner. 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.
Josh: Most banks offer low cost business checking accounts. At Lead Bank, we offer a free Business E-Checking account as well as a Business Standard Checking account, so business owners have options based on the type of transactions they do.
So, the bottom line is, if you are a small business owner, then you need to set up a LLC and get your business bank account established! We’d love to hear from you. We are offering $100 to the reader whose question is selected next. Please submit your business questions to together@lead.bank
