The Importance of Keeping Business and Personal Bank Accounts Separate

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It doesn’t matter whether you are an established business or you are just starting out, it is imperative that you keep your business finances separate from your personal finances.  These same basic principles apply whether you have a full time business or you just have some sort of part-time venture.  Separate bank accounts are a must. Not only will it make it much easier to keep track of all of the expenses for your business, but it can also help ensure you pay the correct amount of taxes. You may have heard the old saying, “Keeping your books in order keeps the tax man from your door”.

Your Professional Image

While you may think this is superficial, it’s really quite important.

Having a separate bank account for your business gives your business a professional image.  Who wants to pay a business invoice that has your company name on it with a check that says “John and Debra Davis” on the check? It’s confusing for the vendor and doesn’t give you a professional image. It’s equally important when you are paying your taxes that those checks are written by a business entity. Be sure that all aspects of your business present a professional image. You don’t want there to be any question about whether your business is really a business or a hobby.

Why is it so important?

From a strictly business standpoint, it’s important to keep scrupulous records. The IRS requires that you keep personal transactions separate from business transactions. They want to know just how much money your business is bringing in. Even though the IRS doesn’t require you to maintain separate bank accounts, this is really the only way to maintain a clear audit trail.

If your business is incorporated or if you plan to incorporate at a future date, then it is required that you maintain separate bank accounts since the company is a tax paying entity.

Business Expenses

As a business owner, you want to take advantage of all the business expenses that you are able to deduct. If you don’t have a separate business account, you “muddy the waters” where the IRS is concerned.  Also, when you are self-employed, you will be paying both the employee and employer share of Medicare and Social Security taxes as well as any income taxes you owe.  Having only business transactions in your account just makes it easier from every standpoint. And, your accountant will love you!

Defense for an Audit

Small business owners statistically have a higher chance of being audited by the IRS than individuals, so it’s important to have everything in order should that happen. If you have always maintained that separation between your personal finances and your business finances, they will be able to see that you have made every attempt to do things in a professional manner. Keeping good records and maintaining separate bank accounts will be your best defense if you find yourself in the position of being audited.

The information above is the opinion of the author and should not construed as legal financial, accounting, or other professional advice.

About Author

Sharon Vornholt

Sharon has been investing in real estate since 1998. She owned and operated a successful home inspection company for 17 years. In January of 2008 she took the leap of closing her business to become a full time real estate investor.

6 Comments

  1. This seems like such common sense, doesn’t it?
    But if someone’s never had a business before, they may not know or may not understand the reasons.
    Great post. So clear and a very important heads-up! You may just have saved someone a lot of time and aggravation.

  2. Certainly maintaining business and personal bank accounts helps you analyse your business growth as well and its certainly gives the chance to its owner to get to know easily after one year or five years where did you starts and what stage you are that current pointing time.

    IAS (international accounting standard) also stating that one should maintained both business account and personal account separate as business treats as a separate entity.

    If this is the strategy the business growth easily analysed even after 15 or 20 years later.

    Thanks for sharing great article. 🙂

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