When you run a business, you have a lot to manage. Sometimes things get overlooked in the beginning, like setting up a bank account dedicated solely to the business. Why would that be important? Well, for starters, it helps keep your business and personal transactions separated, which is a best practice. There are also the legal issues which can result if you do not take the time to separate the two types of transactions. Nowadays many banks offer free business checking accounts so there shouldn't be much holding you back.
When creating an LLC or a corporation, the primary advantage of doing so is the legal liability protection provided to you. Courts see you, the individual and owner, as a separate entity from your business. If issues arise and you were to get sued, not having separate finances could work against you. A co-mingled account, an account where both types of transactions commonly occur, could alter the views of the courts and view you and your business entity as one and the same rather than separate as you intended. What can happen? You may be liable during legal action right along with the business thus defeating the purpose of having a separate entity.
A Relief Come Tax Season
For some, the thought of tax season brings stress. Not only can compiling financial information be stressful but realizing the results of how the previous year went financially can be daunting if you’re presented with a large tax bill. There is one way to make this process much easier for both yourself and your tax preparer, the best CPA in Charlotte! Separate your business and personal bank accounts. Since you need to file your business income and expenses separately from your personal transactions, having two different accounts gives a clear picture of the activity which should appear in each respective section of the tax returns. If your accounts are intertwined then this process will be only further complicated by having to sift through all the business and personal items just to get started with categorizing the business items. If your business is recognized as a separate taxable structure it may also create red-flags to the IRS on your tax returns.
Finally, and more commonly, you may have a higher potential of missing deductions that you would be entitled to. Whether you use the best CPA in Charlotte to file your tax returns, or do them on your own, messy record keeping will definitely cost you time and money and may result in missed deductions and a higher tax liability.
Validation of Your Business
The IRS has one mission, generating income for the United States government. Separating your bank accounts is one of the best ways of convincing them that you are running a business and not partaking in a hobby. Not sure what the difference is? Check out our post here for more info about when you have a hobby vs. a business. If you were to be audited, clear proof that your business expenses go through a separate channel can help you validate that you are actually operating a business. Although receipts are the primary document to justify your deductions, bank statements can be used as a supplement to prove a transaction has occurred. Since banks require key information before opening a business bank account, the existence of such is a great foundation to proving you are a running a bonafide business. It’s key to note that you need to have a business account that is linked to your business name (and EIN if you have one). Having separate personal accounts is not good enough in most cases.
Not only is it important to be able to justify your business to the IRS, but it is also important to appear professional to your suppliers and your customers. When you make payments to a supplier from a business account you automatically appear more professional and established. It’s an opportunity for you to get your business name out there with the information on the top of your checks.
The bottom line: not only does separating your accounts make your life easier, it also helps you when dealing with the law and the IRS. To be successful is to act successful and this one is a no brainer.