I’ll Just Use My Personal Checking Account!
A lot of small business owners use their personal bank accounts when they start their business. It can end up being a big mistake. Let’s talk about why and then what you should do about it.
There are several reasons running co-mingling your personal account with your business is a bad idea. Let’s explore a few of them.
Hobby versus business. It may be hard to convince the IRS that your small business is not just a hobby. In the beginning you might have some business losses to offset your personal income. This is much harder to prove if you don’t have separate banking records. The IRS might just conclude you are trying to write off a hobby.
Limit Liabilities. This is especially true if you have formed an LLC, but is also relevant even as a sole proprietor. The idea of forming an LLC in the first place is to limit your liability. (That must be why the LL in LLC stands for “limited liability!” :) But what does this mean?
If your business is sued, the concept of limited liability means only the assets of the business are available to settle any loss. Things like your house are protected from the sins of the business. If you have co-mingled personal assets like your checking account you stand a good chance of what lawyers call “piercing the veil.”
Some experts say even a sole proprietor has a bit of protection when they are operating what is clearly a separate business entity. Just another good reason to have separate bank accounts..
Missed Deductions. As your business picks up activity it is very easy to miss out on deductions when you have to comb through all of your business expenses in a busy personal account. Having it separate makes it easier to spot and categorize them as you go along.
Professional. Put yourself in suppliers and customers shoes. Wouldn’t you find it tacky to get a refund check written on a personal checking account when you thought you were doing business with a business? I know I would.
Business Credit Score. Finally, it’s great when your business has its own identity and credit score. It is also prudent to protect your personal credit score from any possible missteps in the business.
There you have it. Separate bank accounts just make too much sense not to take this step.
Todays online banking options also make it extremely easy to open an account. (Local credit unions are also usually very small business friendly and may be something you want to check into).
Getting started is easy. If you already have a business operating you probably already have what you need. If you’re just getting started, it is pretty straightforward. This article on the government SBA site spells it out.
If you would like information on how we might be able to help you with this, or other bookkeeping needs you can send us a quick note here.