Regardless of the size of your company, deciding to open a business bank account shouldn’t be a question of if, but a matter of when. In an ideal bookkeeping world, every company would open a business account before conducting their first commercial transaction.
But if you’ve yet to separate your company’s payables and receivables from your personal bank account, it’s never too late to make that happen.
A survey conducted by TD Bank revealed that 27% of small business owners use the same checking account for their business dealings as they do for their personal finances.
We get it.
Consolidating all of your income and expenses in one account is convenient – especially if you’re a new or part-time entrepreneur, or are operating as a sole proprietor. But that convenience comes with a price.
Commingling funds is never a good idea from an accounting perspective because it can be all too easy to dip into one source of income to support the other.
Neglecting to keep your personal finances separate from your business funds not only creates potential tax and liability problems for your organization, it can cause you to miss out on some important benefits as well.
Here are some of the top reasons why you should stop using a personal bank account to run your business.
Realistic Cash Flow Information
When your personal and business income and expenses are mixed together in a single bank account, it can be difficult to manage and forecast your cash flow situation.
Having a clear understanding of the cash that’s flowing in and out of your business is critical for preventing setbacks like unexpected cash crunches.
That same financial clarity is also important any time your business needs to:
- apply for a loan,
- obtain new credit, or
- drum up investment funds
Making it easy for prospective lenders to evaluate your company’s cash flow position and financial health is more likely to lead to a positive outcome - whether you’re dealing with a banking institution or a new business supplier.
Most bookkeeping operations are an intricate web of deposits, payments, and transfers. And since many business owners put off their bookkeeping duties until the end of the year, confusing personal and business transactions is common when you use a shared bank account.
If you’ve ever had to sift through weeks of receipts - or analyze a year’s worth of bank statements, line by line - you’ll know how time-consuming a task it can be.
Maintaining separate accounts is the best way to avoid having to figure out whether that 6-month-old cab receipt was a personal or business expense.
Accurate Tax Returns That Will Benefit Your Business
Beyond the time-saving benefits you’ll gain from keeping personal and business dealings autonomous, there are some distinct financial advantages attached to filing an accurate tax return at the end of the year.
The ability to correctly designate payments or deposits as business-related, for example, makes it easier to identify tax deductions and credits you may be entitled to claim.
On the flip-side, commingling personal and business banking transactions can lead to messy, inaccurate accounting records that result in penalties and fines when your organization is audited.
Many such tax-related charges are subject to compound interest, as well – an important consideration when your company is hit with an expense it wasn’t prepared for.
Fewer and More Favorable Tax Audits
Speaking of tax audits, you’ll be far more likely to breeze right through them - or avoid them altogether - if you invest in a dedicated business bookkeeping system. Although the government doesn’t require that you maintain a separate bank account for your small or solopreneur business, there are at least three good reasons why you should:
- Because a sole proprietor’s personal and business finances are so closely linked (they’re actually reported together at tax time), these types of operations are more likely to be audited.
- The IRS requires that income and expense records be accurate, complete, and permanent. The best way to produce a clear audit trail is with separate business bank and financial account statements.
- Special tax rules apply when individuals claim expense deductions related to hobby-driven, rather than business income – just one more reason why using a personal account for commercial activity can prompt the IRS to take a closer look at your books. And if you are audited, the onus will be on you to prove you’re running a bona fide business.
Getting help from an accounting professional to permanently separate your personal finances from your business activities may be one of the best decisions you’ll ever make for your future success.
Not only will it simplify your record keeping, you’ll be laying the groundwork for long-term business growth.
Photo credit: Canva