If you have a business, you need to separate your business and personal accounts and spending asap. It doesn’t really matter how you are organized (sole prop, LLC, corp, etc.), you really need to have a separate business checking account. If you don’t have a separate business entity (LLC, S corp, etc.), you can set up a separate personal account (bank or credit card) and ONLY use those accounts for business purposes. Why?
Reason 1 Bookkeeping:
It makes it so much easier to do your bookkeeping if all of your business income and expenses are in one place! Plus, I guarantee that if you have to dig through your personal accounts for business expenses, you will miss something at some point. This means missing out on deductions and paying more tax.
Reason 2 Audit:
If you get audited and can show the auditor that your business account only has business income and expenses in it and your personal account only has personal stuff in it, then it can work in your favor.
- Example 1: If you have a credit card transaction to Target for office supplies but don’t have the actual receipt and you don’t have your personal expenses co-mingled in your biz account, then an auditor might believe you when you say they are for office expenses. On the other hand, if you have co-mingling of funds, I doubt the auditor will take your word that the Target expense is for business if you don’t have an itemized receipt showing exactly what was purchased.
- Example 2: If you have co-mingled funds, an auditor can easily question the $100 birthday gift you deposited and reclassify it as business income if you can’t support otherwise.
Reason 3 Separate Assets:
By having separate accounts, you are supporting the legitimacy of your business! This is incredibly important if you are operating as an entity (LLC, corp, etc.). One of the reasons for setting up your business like this is for liability purposes to create separation between your personal and business assets. If you are co-mingling your funds, you are definitely not keeping your business and personal assets separate. Even if you are operating as a sole proprietor, you should keep a separate account. If the IRS ever wanted to question the legitimacy of your business, having a separate account can help support that you are truly running your business as a business. Super important if you have continuous years of tax losses.
So head on down to the bank if you need to set up an account, and if you already have a separate account, try to keep your items separate as much as possible.