1. Money

Reasons to Open a Business Bank Account

Keep Your Personal and Business Finances Separate

By

When you open a business, one of your first tasks should be to open a business bank account. It is important to keep your business banking separate from your personal banking. It's not enough to just keep separate records. You should actually keep the money physically separate in different bank accounts, one set up as a business checking account. Some business owners even use different banks for their business and personal accounts, one being a business bank only. Here are some reasons to keep your business funds separate from your personal funds.

1. Clean and Accurate Bookkeeping

Imagine your checkbook and your bank statement if you mix your business and personal transactions. Now imagine that over the course of a year. That's what you would have to deal with at income tax time if you mix your personal and business finances. No one wants to deal with that mess. If you have a separate account for your business transactions, then you have a clean record to give to your accountant at the end of the year. Remember to keep all your invoices and receipts to match up to your checkbook and bank statement entries and you will be in good shape when income tax time rolls around.

2. Prove Your Business is not a Hobby

The Internal Revenue Service (IRS) is really picky about you being able to show that your business is really a business and not a hobby. Basically, you have to show a profit on Federal Tax Form Schedule C three years out of every five. If you have losses that you deduct from your income three consecutive years, then the IRS may decide you are conducting a "hobby business." You will be inviting an audit. Even if you pass the "3 out of 5" rule, you are not necessarily safe from an IRS audit. You can further prove you are a business and not a hobby business if you have a separate business bank account, business cards, or a well-maintained set of business books.

3. Separate Business Account Required for Incorporated Businesses

If your business is incorporated, the IRS requires that you keep a separate business bank account. It doesn't matter if your business is a corporation or a partnership or an incorporated sole proprietorship. If you're incorporated, you must have a separate account.

4. A Clear Audit Trail for the IRS

Hopefully, you will never be audited by the IRS. There is always that chance. If that happens, it's not the end of the world as long as you have clean recordkeeping and a separate bank account. You also need to be sure and keep all your invoices and expense receipts as backup material. If you mix your personal and business finances in one bank account, an audit by the IRS will turn into a nightmare.

5. Professionalism

You always want the appearance of professionalism by your business. If you keep your business finances separate from your personal finances, that helps enhance your image of professionalism. It means that when you write checks to suppliers, they see that those checks are coming from a real on-going business concern. If you pay taxes, the IRS sees that the tax payments come from a real business.
Related Video
Adam Gerber on advertising business models

©2014 About.com. All rights reserved.