When you are running your own business, you may be looking at a lot of different things that come into play with the money side of things. How much comes in and out of the business? Are there costs that you can decrease in order to make your business more profitable?
Why Keep Separate Business and Personal Bank Accounts?
A very common question that comes up, particularly with new small businesses, is whether or not you should separate your personal bank account from your business bank account. There are great arguments on both sides of this discussion, but the general rule of thumb is that you should. Here are some of the main benefits that you get from separating your accounts.
- It prevents you from (intentionally or unintentionally) using business money for personal needs.
If we have our accounts together, we may accidentally crack into our business savings for a personal splurge or emergency. It is much easier to thwart that temptation if it’s in a second account.
- It makes it more difficult for you to use personal money for business needs.
Yes, there are times that you may have to dip into your savings for your business, especially if your business is new and not yet profitable. But, as your business grows, it should be able to pay for itself except during emergencies. Having your personal money in a separate account prevents your business from eating up your savings account.
- Most importantly, it makes things much simpler for tax purposes or if you are audited.
If you have your personal and business accounts together, it makes doing your taxes doubly difficult and makes an audit much more complicated. An audit is when the IRS or another agency comes in and looks at the taxes related to your business or personal taxes. We’ll look at this point more in the next section of this post.
Why Should You Be Concerned About an Audit?
There are several reasons that your business may be audited.
- There are “red flags” that the IRS sees in your taxes.
- If your business is newer and you had a lot more (or a lot less) income than projected.
- Random selection.
Most businesses get audited several times during their lifespan and, because of that, you want to be able to take care of an audit easily. You don’t want to be sitting there with all of your bank records and dividing your personal finances from your business finances during tax time or audit time. If you have it separate, you can literally print out everything related to your business account and be able to hand it to the IRS if and when they request additional information.
The other problem that may come along is that the IRS may be suspicious about just what is going on with your bank account if you have a combined account. You could end up looking like you’re laundering money or being dishonest about your income, just because you made errors or because the IRS looked at your account and couldn’t make sense of it.
When all is said and done, it’s about making things simpler on yourself. Dealing with the IRS is not always the easiest thing to do, why should you make it more difficult by doing your bookkeeping from the same account? Consider looking at options for a business checking account and you will feel a lot less stress when it comes to taxes and audits.