November 6, 2014 Banking en_US How — and Why — to Keep Your Business and Personal Accounts Separate

How — and Why — to Keep Your Business and Personal Accounts Separate

By Suzanne Kearns November 6, 2014

If you own a small business, you may be tempted to commingle your business and personal accounts, but doing so may bring some unwanted consequences. The way to avoid this is to form a separate financial identity for your business, and never tap those accounts for personal use. In fact, IRS Publication 583 [PDF] states that one of the first things you should do when starting a business is to open a business checking account. Here are some of the other benefits you can achieve by keeping your accounts separate.

  • Create a corporate veil: Once a business is incorporated, a veil is created that protects owners from the corporation’s debts, lawsuits, and other obligations. However, sometimes this veil is “pierced,” making the owners personally responsible. To keep this from happening, it’s essential that you establish separate business accounts, and never commingle personal and business funds.
  • Create a business identity: The IRS will want to ensure that your business is not a hobby. Expenses and losses related to a hobby are not tax deductible, but a business can deduct both. Give your business more credibility in the eyes of the IRS by maintaining a separate business checking account and ensuring that only business expenses are paid from it.
  • Better record keeping: It’s hard enough keeping good records for a business, but when there are personal expenses intertwined in the books, it can get ugly fast. And if you’re paying someone to do your books, they’ll have to spend more time to separate the two, which will likely result in more charges for you. In addition, your tax preparation will go much smoother if your business expenses are all made from the same accounts.
  • Build business credit: If you plan to apply for supplier credit, a bank loan, or any other form of credit, you’ll need to establish a credit identity for your business. Start the process by applying for a business credit card and then only using it for business expenses. And if you have to carry a balance, you’ll be able to deduct the interest on your business taxes, along with fees and late charges.
  • Gain credibility: When you write a check to a contractor or your landlord, it’s more professional to use a business check than a personal one. In addition, you could lose credibility with your clients if you ask them to make payments to you personally when you’re operating as a business.

What’s Next?

Now that you understand the importance of keeping your personal and business accounts separate, it’s time to set up accounts for your business. You can either go to your current bank and set up a business checking account, or look for one that doesn’t charge a fee. NerdWallet offers a list of free business checking accounts sorted by state. If you can’t find one of these banks near you, try NerdWallet’s free business checking account search tool to find the bank near you that offers the lowest fees.

Next, you’ll want to apply for a business credit card to establish a credit history for your company. There are many cards and deals to choose from. In addition, eases the process by offering a credit card search tool that allows you to rank your desired criteria, and, once you find the right card, apply online.

Keeping your personal and business accounts separate just makes good sense. If you haven’t done it yet, why not contact a bank and get started?

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Suzanne has been a full-time freelance writer for 20 years. She’s written for numerous business and financial publications such as Entrepreneur, Reason Magazine, Home Business Magazine, and Money Crashers. Read more