Many small business owners run their financial transactions through personal bank and credit card accounts thinking it is easier (and possibly less expensive). As a business owner, you need to have separate bank and credit card accounts for many reasons.
- The accounting is much easier. When you combine business and personal transactions, you are required to determine which are true business expenses and somehow capture those properly for the tax return. This can be much more time-consuming than having one account for each.
- In case of an audit, it is much more likely that expenses will be disallowed. If it can’t be easily determined if it is a true business expense, the deduction will be deemed personal. The IRS may also classify your business activity as a hobby, in which case deductions would not be allowed.
- You want to develop business credit. At some point, you may need a loan for equipment purchases or expansion. To do this, you’ll need to have built credit under the business name.
- If you are an entity, you don’t want to pierce the corporate veil. As an entity, there is built-in protection from your assets in case of litigation. However, if funds have been mixed, the separation between business and personal is seen to not exist and your assets may be used in the case of a judgment against you.
- You will appear much more professional if paying with a business check or credit card than a personal account. Having checks written to a business name rather than your own gives more credibility as well.
If the reason the accounts are combined is because the business needs more cash in order to operate, it’s best to make a loan or equity investment into the business rather than paying business expenses with personal funds. Once you are ready to make a draw from the business account, it can be a distribution or loan repayment.
If you’re combining business and personal transactions in one account, it’s time to consider a change. Having a business account will make it much easier, and probably save you time and money in the long run.
