The Importance of Keeping Business and Personal Finances Separate | Best Online Banks for Small Businesses in 2020

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You may have started your business without thinking about what the future would hold. But if that future involves you making a profit, the IRS is going to want its share. When you first started your business, like many entrepreneurs, you may have used your personal assets for startup capital, and used your personal credit score to secure a startup loan.

As your business grows, however, creating a clear boundary between your personal and business finances—and maintaining the supporting documents to prove that separation—is crucial to staying on the right side of the law.

Who Must Keep Business and Personal Finances Separate?

If your business is a corporation, you must keep business finances separate because the business is considered a separate legal entity. If you have structured your business as a sole proprietorship, it’s considered an unincorporated business with no legal distinction between it and you, its only owner. Through the sole proprietorship, all profits, losses and liabilities are tied to you personally. Because of this, it’s even more imperative for a sole proprietor to keep business and personal finances separate in case of an IRS audit.

An audit puts the burden of proof on you to disclose your business expenses and income. Keeping good records saves you from having to dig through a huge box of receipts to figure out which purchases were for business and which were for your personal expenses. Keeping your business finances separate also reduces your legal liability and can help you manage your tax and business bills more efficiently.

Are There Recordkeeping Requirements I Must Meet?

The IRS doesn’t require any specific recordkeeping system, except in a very few specific cases, but you should use a system that clearly outlines your business income and expenses. The IRS website has hundreds of resources explaining what records you should keep, how long you should keep them, what forms you need to file and much more.

From a recordkeeping standpoint, one great way to separate your personal and business finances is to make separate banking accounts for each.

Choosing a Business Bank Account

When choosing a business bank account, keep in mind that all banks want your business. This means you can usually negotiate some free or discounted services. You might consider going with the bank where you have your personal bank account for easy transfer of funds, or you might find a bank more suited to your business operations and open your business account there.

Understand their minimum balances and fee structures. Ask around and see where other business owners bank and why. These days, banks are trying to use a personal touch to keep customers loyal, so find a trustworthy bank representative who understands your business. Finally, if you run your business under a name other than your own, be sure to open the business bank account under the business’ name, not your own.

Know what services you need before you talk to the bankers. Are you interested in their merchant account services so you can accept credit card payments? If you have—or plan to hire—employees, can they handle your payroll? Make it a point to go in and actually talk to someone. How helpful and knowledgeable are the staff? What are the bank’s online and telephone customer support services like? Are you assigned your own point person who you can call with specific problems, or just given an 800 number? When the IRS wants to know why a certain tax form has not been filed, you need an answer from your bank quickly.

Once you’ve opened a business bank account, it will be easier to cover your tax obligations without having to delve into your personal accounts. This way, when it comes time to make payments, you won’t be scrambling to transfer money to cover your taxes. This is particularly important for sole proprietors and independent contractors who operate a business under their own names.

Keep Your Accountant in the Loop

Ask your accountant about making quarterly estimated tax payments to the IRS and your state treasury. If you do end up mixing personal and business finances, such as using your personal funds to invest in your company or purchase something for your company, always ask your accountant how to record the investment in your bookkeeping program. You should also upgrade your accounting software to a business version so you’ll have more options and guidance in maintaining the appropriate financial records for your business.

https://quickbooks.intuit.com/r/financial-management/the-importance-of-keeping-business-and-personal-finances-separate/

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