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Do I Need a Separate Bank Account for my Business?

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The Second Bank Account

Starting a small business, or even a large business, can take a lot effort, work, and unfortunately:  paperwork!  So, for a variety of reasons, people will try to keep their paperwork to a minimum.  One way they will do this is to simply use their personal account to handle their business finances as well.  This way, they think, I just have one set of books to look at and (the payoff) less paperwork!!!

As tempting as this route might be, there are some things to consider before deciding that this is the 'best way' to cut back on your paperwork.

First, the Account...

So, you keep only a single account.  After all, you get paid by your clients, and that money is mine anyway, so why not just deposit it into my account and be done with it?  Lets start with the title of the account.  You have a business card, Bob's Shoes, and your customer purchases a pair of shoes and starts to write out a check.  She hands you a check payable to, of course, Bob's Shoes.  Problem #1 has occured:  You can't deposit Bob's Shoes into 'Robert Smith's' account.  

Why?  Because the bank has no record of Bob's Shoes being owned by Robert Smith, they only have the records on Robert Smith.  Maybe Bob's Shoes is owned by someone else and this check does not belong to them.  After all, Bill Gates (even though he is the primary owner) cannot take a check written to Microsoft and deposit it into his personal account.  The bank wouldn't want the responsibility being in the middle of a fight between Bill Gates and Microsoft.  Who owns GE?  Can any share holder deposit a check written to GE into their personal account?

What if Robert Smith has a partner?  The bank doesn't know if Bob's Shoes has any other owners, and they wouldn't want David Shoes to come to the bank wondering why his business's checks are being deposited there.

So, all business checks would have to be written to a person, which doesn't sound as professional as writing checks to Bob's Shoes.  This reason, alone, should prevent people from using the one account.  However, there are other reasons.

Second, the Accountant...

 

I often tell my business clients, or prospective business clients, that their accountant won't mind them using one account at all.  Obviously, at $100/hour (or whatever they charge), they don't mind reading through a single set of books line by line and determining:  Personal Expense...Business Expense...Business Exp...Personal Exp...Etc.  

And then there is that trip to Staples for $550.  That's a business expense, right?  Who spends $550 at Staples for fun?  Well, when it is 'Black Friday', there are often sales at all sorts of retailers.  Staples is included in this list.  My wife once bought her laptop at Staples on Black Friday (not for $550), but it wasn't a business expense just because it was at Staples.  

Even the Accountant can make that mistake, and either take the time to research it themselves or call you for your opinion on it (and they charge by the hour on those phone calls, too).

Of course, the Accountant is not the only one you need to worry about.

Third, the Attorney...

When you share a single set of books for your personal and business, you set yourself up for making the business and you one single entity.  Now, when you are a sole proprietor, you are by definition a single entity.  However, if you spent all that money to start a corporation or a limited liability company (LLC), you are 'breaking the veil' of the separate entity, which can eliminate any protections you had by keeping the business separate.

When you are the defendant in a lawsuit, and the other party is seeking damages, you could be opening your personal assets up to a business lawsuit.  You could also open up your business assets to a personal lawsuit.  Say goodbye to that bull dozer because you had a cracked sidewalk at home.  Because you use personal and business assets together, then that $100,000 bull dozer must belong to you and not your company (Explain that to David Shoes...).

Of course, if you think the opposing attorney is bad, you have forgotten one other which is far worse...

Fourth, the IRS...

In some ways, this goes back to your accountant you put in charge of managing your 'book.'  See, he promised you he could cut your tax liability so you could keep more of your money.  The IRS, not certain why anyone needs to have a 'business meeting' at the local McDonald's every morning at the drive thru, decides to come visit you and the accountant to 'discuss' it.

Now, while the accountant might be there to 'support' you, you are still the tax payer and, thus, are the one responsible for the taxes.  Remember that $550 trip to Staples, that was for your kids new cell phones...not a business expense.  Oh, and the IRS is going to go through that book line by line, too.  Now the accountant gets to work overtime hours explaining to you and the IRS together why he sorted your expenses like he did.

And you thought David Shoes was upset about losing the bull dozer?

Fifth, the Banker...

Yes, your banker has spoken with you time and again about setting up that separate account for your business.  However, you have seen them talk about how they 'scored' this account or that account like they were a trophy.  They might be a trophy.  They might have even 'scored' a commission on setting up that business account for you.

However, they are currently on better terms with David Shoes than you are right about now.

In Conclusion

No one can force you to keep your banking accounts separate, unless there is some law out there that I am not familiar with (banker, not an attorney).  However, when you ask the IRS, when you ask the Attorney, when you ask the Accountant, and when you ask David Shoes, they might advise you to listen to that banker when they talk to you about keeping your personal records separate from your business records.  

Ok, maybe the accountant won't recommend it because he considers the overtime with the IRS good for his business.  But ask him how many bank accounts he has before you make your final decision on what the best course of action is.

David Shoes will appreciate it.

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