Having separate accounts will protect you and your business.
Separating your business and personal finances makes managing your money much easier, and it prevents any personal risk for legal liability in the future. It can be hard, especially when starting out, if you’ve used personal savings to fund your company. In the long run, though, it will make your life much easier come tax time.
Why You Need Separate Accounts
If your finances are intertwined, it can be hard to keep track of what can be deducted and what can’t when it’s time to file your taxes. (Did you buy that coffee for the office or for yourself?) It will be difficult to remember every purchase, and deducting items unrelated to your business could get you audited. If you have a separate bank account and credit card for business transactions, this won’t be an issue, though.
If your business is a corporation, you don’t have a choice. It’s a legal entity and requires its own finances. If your business is a sole proprietorship, there’s no legal distinction between you and the business, meaning all liabilities and losses are linked to you. That makes it even more important to keep finances separate to prevent you from risk and in case of an IRS audit.
In the case of an audit, you’ll have to show all business expenses and income. This requires organized record keeping, and it’s trickier when you’re sorting through one account to pull out specific expenses. If you have a separate business account, you already know that all purchases from that account are business purchases, and all income is clearly tracked.
How to Maximize Small Business Success
It may seem daunting to set up a business, but it can actually be quite simple. First, establish a separate legal entity for your business. An experienced attorney can help determine if you should create an LLC, a corporation or another form of business. No matter which you choose, it creates a legal boundary between you and your business and allows you to file personal income tax and business income tax separately. You’ll also want to apply for an employer ID number (EIN) with the IRS. It only takes a few minutes to set up on the IRS website and ensures that your social security number will only be used for you personally, not for your business. Finance site Money Under 30 notes that this also helps protect your identity.
Next, create a separate bank account and line of credit. In some cases, it’s easiest to go with the same bank you use for your personal account so you can easily transfer money between the two. In other cases, a bank may offer incentives for business accounts, so it would make more sense to set up there. Ask around to business owners in similar industries to see if they have bank preferences and why. Whichever bank you choose, make sure you understand any fees or minimum balance requirements. Of course, you should open the business account under the business name, not your own name.
Before speaking with a banker, Quickbooks says it’s important to know exactly what services you need. If you want to accept credit card payments you may need merchant card services, or if you have employees, it may be nice to have a bank that handles payroll. Take note of the bank’s customer support services and if possible get a number from a specific banker rather than a 800 number.
Creating a separate legal entity, opening a designated business bank account, and keeping track of expenses along the way is the best way to save yourself stress and a potential audit come tax time. Though it may seem like a hassle to set up, once your business finances aren’t entangled with your personal accounts, the peace of mind will make it all worth it. The experienced attorneys at ALA can make the process even less stressful by guiding you through the legal process and helping you establish your company as the type of business that’s the best fit for your needs. Contact us today.