If you’re a small business owner there’s probably a lot of overlap between your business and personal finances. It can appear much simpler to keep just one bank account – money from clients comes in, and all your expenses, business and personal, go out. However, there are several key reasons why you should separate your business finances and personal finances, including the fact that it will help protect your personal assets and streamline your tax record-keeping. Here are the top three reasons why you need a business bank account:
1. It keeps the “corporate veil” intact to protect your personal assets.
Many small business owners form an LLC (Limited Liability Company) or Corporation because it helps shield their personal assets from things that might happen in the business – for example, if the business is sued or can’t pay its debts. This is known as a corporate veil since it puts some separation between the business owner(s) and the business.
In order to keep that personal liability protection, you need to properly maintain your LLC/Corporation and that includes keeping a sharp line between business and personal finances. Maintaining a business banking account is an important step to ensure that your business is its own entity and separate from you, the business owner.
In case your business is ever sued, the plaintiff may try to pierce your corporate veil by showing that you haven’t maintained your Corporation/LLC to the letter of the law. In this case, they can go after your personal assets. This is why it’s absolutely critical for LLCs and corporations to keep business finances completely separated from the personal.
2. A separate account helps avoid tax time woes
A combined personal/business account is messy, making it harder to organize your books come tax time. You may find yourself wading through all of your past year’s transactions, including trips to the grocery store, to find business expenses to write off. Having separate accounts streamlines your record-keeping – saving you time and ensuring you won’t miss any legitimate deductions.
3. A banking account boosts your business’ legitimacy
When you’re running a business, it can look a tad unprofessional to pay your contractors with a personal check or have your clients write a check to you as an individual. Will this ever be a deal breaker? Probably not. But, having a dedicated business banking account can send the right signals as you scale your operations and evolve from freelancer to business owner.
As a side note, if you’re running your business as a sole proprietorship, you don’t legally need a separate bank account for your business, but it’s still a good idea for the second and third reasons. In addition, having a business banking account can help make your case to the IRS that you are indeed running a business and are entitled to deduct your business expenses should you ever be audited.