Small Business Basics: Should I Open A Separate Business Bank Account?

Small Business Basics: Should I open a separate business bank account?

by

Nicole Newman

For some, starting a business is just a thought. Some initial steps are to incorporated the name and then opened a business bank account. One of the things I did wrong was hire an accountant. One of the things I did correct was to: A. Incorporate and B. Open a separate business account. Here are a few reasons to keep your business funds separate from your personal funds.

1. Clean and Accurate Bookkeeping

As we look at Financial literacy month, The Credit Woman is making sure personal finances have a budget. It is the same in business – separating a business acount can help the owner make and stick to a business budget.

2. Proof that your Business is not a Hobby

The Internal Revenue Service (IRS) expects that a business can prove that is it not a hobby – \”an activity not engaged in for profit.\” From irs.gov, \”The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses. If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. If you have losses that you deduct from your income three consecutive years, then the IRS may decide you are conducting a \”hobby business.\” Then the business has opened the flag for an audit. Opening a business account shows that you take your business seriously and it is not a hobby.

3. An Audit Trail for the IRS

\”Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.\” That is why the IRS audits – they want to resolve some of that 30 billion in unpaid taxes per year. If your business is audited, it will be much easier as long as you have clean recordkeeping and a separate bank account. If you are paying business expenses out of a personal account, the IRS has the right to say those expenses are personal.

4. Professionalism

The Pennsylvania Women and Minority Enterprise (W/MBE) certification looks for a business account and your accounting/invoicing system is more professional when checks are being made to your business name. Freshbooks, the preferred invoicing system allows your business to upload the logo and maintain a professional appearance. The goal should be to invest into your business for the appearance of professionalism. It means that when you write checks to vendors, they see that those checks are coming from a real business. If you pay taxes, the IRS sees that the tax payments come from a real business.

5. Building Relationships

One of the most critical relationships in business is with a lender. You can not grow a business without a financial plan. Relationships are built over time, so get started building a relationship with your bank today!

Nicole Newman

is passionate about seeing businesses grow using technology tools that increase productivity. The digital divide is separating the United States into two communities: technology-savvy and technology-illiterate. With a Temple University bachelor\’s degree in Management Information Systems, she is armed with solutions.

Article Source:

ArticleRich.com