I was talking with a client recently and she asked this question:
“Why should I have a separate business checking account?”
Different people may counsel you differently regarding this because it can be cumbersome to maintain multiple checking accounts, but I always advise keeping business finances separate from personal finances for the below reasons:
1. Record keeping
Do you know how much came in (or went out) last month or last year for your business? Even if it wasn’t much, having a separate bank statement makes it easy to quickly assess how the business is doing. Your personal finances may be subsidizing your business more than you prefer. Or your business finances may be subsidizing your personal activities more than you are hoping. The bottom line is you don’t know if these are mixed together. Maybe you’re an amazing record keeper, and if you are and you’re a sole prop, a separate checking account isn’t REQUIRED. But in my book, it makes things EASIER.
Whether you file as a sole-proprietor on a schedule C or file a separate tax form for your business, having good records of income and expenses related to your business are key to preparing an accurate tax return and paying the right amount in taxes. Most people would like to (legally) minimize their tax burden. Good record keeping is key to this and separate accounts contribute to this. It also makes it easier if you ever face additional scrutiny from tax agencies to have clean bank statements you can provide.
3. Your spouse or business partner’s interest
My wife and I use a joint checking account because I want every financial decision I make to be something my wife is comfortable with and this setup reinforces it. Knowing that she can look at any point and see what’s happening creates security for her and transparency that is healthy for me. I believe the counter is also true for businesses. If you’re currently (or in the future) operating with a partner in your business, then allowing that person to see the bank statements creates similar security and transparency. You can’t do this easily if personal and business accounts are commingled. NOTE: This is also applicable for investors.
4. Potential liability
If you have taken the extra step to create a separate legal entity for your business, mixing the finances can actually reverse the liability protections that this step gives you. If you can’t prove how much money belongs to the business versus your personal account, your personal funds may be at risk if a liability issue comes up in the future.
Writing checks on a business account adds a level of professionalism when you interact with vendors and other contacts.
6. Looking ahead
If your business grows and you want to hire a bookkeeper to maintain your business finances, having a separate account from the beginning will make this easier for them to help you keep your records.
Lots of banks offer free or inexpensive checking account options, especially if you already have a personal or savings account carrying a balance.
One practical tip
When you are just starting out and only have expenses, it may be easiest to start by getting a separate credit card to use for all business expenses. Even if you pay the bill with personal funds, having that credit card statement helps with many of the factors above.