There are more than 30.2 million small businesses
in the United States, with this number growing each year. There’s no question that opening our own business and being your own boss is extremely appealing.
However, as you step into the role of small business owner, you also take on many new responsibilities. You have to make sure your business is successful while protecting it, and yourself.
While there are many steps you need to take to do this, one that some overlook is their banking situation. They believe it is fine to use their personal checking account for business purposes. This isn’t a good idea.
Learn why it is important to open a business bank account here.
1. Avoid Tax Issues
One of the fastest things that can cause you issues is allowing your business funds to mix with your personal account. When you open a business, you are creating a legal entity that is separate from your personal finances.
You need to make the distinction and segregate your finances. Doing this can help you avoid tax issues that occur when you mix funds in the same bank account.
The main reason for you to keep your accounts separate can be explained with just three letters – IRS. It’s going to be more difficult for you to categorize business versus personal purchases if all your funds are together. This is an important distinction if your business winds up being audited.
Accounting needs for a business are often complex. However, it’s easier than trying to sort everything out in front of a revenue agent. Keep personal funds personal, and business funds in their own business account.
2. Accurate and Clean Bookkeeping
Just try to imagine how confusing your checkbook would be if you mixed personal and business transactions. Now think about that over the course of an entire year. This is what you will have to sort through when tax time rolls around if you don’t have a separate business account
No one wants to have to deal with this type of mess. If you keep a separate account for all your business transactions, you will have a clean record to give your accountant each year.
Keep in mind, you need to keep all your receipts and invoices to match up with your bank statement and checkbook. If you do this, you will be ready for tax time.
3. Protect Yourself from Legal Liability
Regardless of the size of your business, you may find it is vulnerable to legal trouble. This can be due to an unpaid vendor who is suing you, or a disgruntled client.
If you want to minimize the risk of losing your personal assets if a lawsuit is filed against you, you have to have a separate business entity created. You have several options, such as a sole proprietorship, corporation, LLC, etc.
In addition to all the IRS reporting and accounting benefits, if you own a business, you need to create some type of legal protection. Once you have incorporated your business, you need to follow certain best practices. The most important of these is not using your personal bank account for business purposes.
If there is any type of liability issue with your business, the first things the courts are going to look at is if you have a business bank account. They are also going to check and see if your personal funds have co-mingled with your business funds.
If there is proof of this co-mingling, then your personal assets may be at risk.
4. Provide Proof Your Business isn’t a Hobby
Back to the topic of the IRS. They can be extremely picky about you being able to prove that your business is a business, not a hobby. To prove this, you have to show a profit three out of every five years on the Schedule C form.
If you have any losses that are deducted from your income for three consecutive years, then the IRS may determine you are running a “hobby business
.” If this is the case, you are asking for an audit.
By having a separate business bank account, you can easily prove that you are running a legitimate business, not a hobby.
5. Present Yourself as a Business Professional
If you are writing checks from your personal checking account to buy inventory for your business, services or supplies, you may come off as an amateur. The fact is, there are some vendors who are only going to accept payments from a certified bank check or business account.
Also, clients or clients may be hesitant to deal with you if they have to pay you personally, rather than paying the business. They want to make sure they are dealing with a legitimate business.
6. Receive Credit Card Payments
In addition to presenting a professional business, there are also some logistical reasons you need to have a business checking account.
For example, this is required if you plan to accept debit or credit card payments from your clients.
Don’t Wait to Open a Business Bank Account
If you have been in business for a while, or if you are just starting out, don’t wait to open a business bank account. In the long run, this is going to be the best thing you can do for your business.
If you need more information about opening a business bank account or are just searching for a quality service provider, contact us today
. At Signature Bank, our goal is to meet and exceed our client’s expectations at every turn.