One of the easiest steps an owner can take when starting a business is to open a separate checking account. Yet many sole proprietors — and even some self-filed corporations — choose to use their personal checking accounts for business. I see this as a big mistake, and here’s why:
- Comingling business and personal dollars can be extremely confusing when an owner and/or accountant must reconcile the business’s finances. It could even lead to lost deductions or tax credits!
- Separate accounts also make it harder for owners to raid their company’s cookie jar! As a rule of thumb, even small businesses should establish and keep a $5,000 reserve in their checking accounts. This may be very difficult for a new businesses, but owners should set it as a short-term goal.
- For small business corporations, mixing personal with corporate expenses pierces the protective legal shell enjoyed by the corporation. It opens the business to increased liabilities.
- Finally, commingled funds could cause extra taxes and will cause larger professional fees if the company is audited. State and federal tax agencies like to use the “deposit method” to reconcile a business’s income. In short, all deposits, from any bank account are considered to be income until proven to be personal in nature. This proof can be very tricky to find in archived records. Those records also may be costly to obtain from your bank for audits, which typically are conducted two to three years down the road. In most cases, the audit agent will dismiss reviewing your personal checking records if you maintain separate “business” bank accounts.
My advice: For your peace of mind– both business and personal — don’t mingle your money!
Eric