For some reason, many small business owners use their personal credit and their personal bank accounts to run their business. This is mainly due to either limited means, inexperience or a misunderstanding of how banking works and the risks associated with conducting business from a personal account. In this article, we’re going to explore why having a separate bank account for a small business is essential and why you need to get one today.
A small business owner whose checks say “My Name Doing Business as XYZ Business” has less credibility than checks that say simply XYZ business. Your customers see you as a professional when their checks for invoices are written to XYZ Company, not you personally. Lenders take you more seriously when you show a business checking account versus mixing personal and professional finances.
Having your own business checking account simplifies the bookkeeping. You track all of your income as deposits to the account and all your expenses as debits or checks from that account. At the end of the year, an audit of the business only looks at the business account instead of trying to separate personal and professional expenses out of a personal account.
And an audit of your personal finances doesn’t mean your business expenditures come under scrutiny. You can still pay yourself from your business account. You simply transfer the money from business to personal checking and count that as a business expense (salary to the owner) for your business; it is recorded as personal income for yourself. But by having a separate business account, the end of the year income and expenditure reporting and taxes become much simpler. The fact that your business accountant doesn’t see how much you spend on groceries and music lessons is a side benefit.
Calculating your profit and loss figures on a monthly, quarterly and annual basis is also much simpler if you don’t have personal expenses and salary income that need to be edited out. And you can get a clearer picture on how much you are earning from the business in the form of deliberate income you take out of the business instead of assuming all of the income is what you’ve personally earned.
Having a separate business checking account is necessary for maintaining separate personal and professional liability. For example, if you are raiding your business bank account to pay your personal mortgage and childcare bills, tax agencies and creditors could say you’ve pierced the corporate veil. This means that if you are sued, your personal assets, as well as your corporate assets, are now liable. And if you have not maintained a separate set of accounts for your business, then auditors could assess all of your personal income at a business rate or find you guilty of tax fraud for accidentally deducting personal purchases through the business as business expenses.
Another reason to keep your personal and professional finances separate is in case the business fails. If you have a separate bank account, lines of credit and insurance for the business, then when the business goes into bankruptcy, only that entity is shut down. Your personal assets are untouched. If you mix personal and business accounts or run your business through personal accounts, then your business going into bankruptcy probably involves a personal bankruptcy as well.
You need a separate business bank account to simplify your bookkeeping and avoid problems with tax authorities. Having separate accounts for your personal and business matters ensures that your corporate entity remains separate legally in case you are sued or have to declare bankruptcy. Customers and lenders will take you more seriously, too.