As a small business owner, it's important to have a dedicated bank account for your business. This helps to keep your personal and business money separate, and makes it easier to do your taxes. In this blog post, I’ll show you two important things: 1) how to open a business bank account with QuickBooks, and 2) how to pay yourself using an owner's draw.
When I first started my business, I had zero education about how to run it—I just went for it. My wife and I invented a wood burning marker called Scorch Marker. At the time, I thought it was simple—make a thing and sell it. Wow, was I underestimating the work involved! I had to learn things on my own, the hard way, and I made a lot of missteps in those early days before getting things figured out.
Since then, we’ve been able to grow our business, get into retail stores, raise money, and launch a ton of new products.
I hope you can learn from my mistakes!
If I could go back in time, there are two things, in particular, that I'd do differently:
- I'd use accounting software, instead of trying to keep track of expenses using a spreadsheet.
- I'd open a separate bank account right away to keep my business money separate from my personal money.
When tax time came around at the end of that first year, my CPA asked me what I spent on the business—and honestly, I couldn't answer him. My money was commingled in a single bank account, and it was a nightmare trying to figure out what was what!
I had to pay more in taxes than I should have, and then I had to pay for help to fix the problems that I created.
All of this could have been avoided if I’d just opened a separate business bank account and tracked my business cash flow from the outset. I’m going to teach you how to avoid making the same mistakes that I made by showing you how to open up a business bank account with QuickBooks for free!
- Sign up for QuickBooks Online
- Go to the menu side, hover over “Cash Flow,” and then select “QuickBooks Checking”
- Follow the on-screen instructions to open a business bank account
- Provide your business information
- Upload your Articles of Organization (if you have an LLC this is the LLC paperwork)
- Upload your EIN (Employer Identification Number)
Setting up a small business bank account is a crucial step in any business. This account will let you keep personal and business funds separate. As money comes into your business it'll be deposited in this account, and whenever you have a business expense of any kind, you will use this account. This includes things that you need to start and run your business, like:
- Cell phones
- Accounting software
- Bank fees
- Account fees
- Business licenses
- Employee wages
- And so much more
Having a dedicated bank account for your business is essential to keeping track of business and personal expenses, so that you’re not tearing out your hair reviewing every single check you’ve deposited or purchase you’ve made, when tax time rolls around.
Luckily, QuickBooks Online automatically tracks all of your transactions so you don't have to do any extra linking of accounts; all you need to do is make sure all of your expenses go in the right category. You can do this yourself, or you can hire a professional bookkeeper to do it for you. I use a bookkeeper, and I love it!
Eventually, you’ll get to a point where there's money left over in your bank account. You’ll use that profit to pay yourself!
Your profit is the money left over after subtracting all of your expenses.
Here’s an example:
I own a craft company called Scorch Marker that sells craft supplies and kits.
One of our products is a crafting kit that we charge $100 for. I wish we got to keep all $100 from each sale, but to make that money, we have to spend money first.
Money spent to make more money is known as expenses or costs.
Let’s look at a few of the costs in our $100 kit:
- Manufacturing ($25)
- Shipping ($15)
- Packaging ($4)
- Marketing ($20)
- Employee labor ($7)
If we know that: Profit = Sales - Expenses, then $29 profit = $100 sale - $71 in expenses
That’s how we calculate profit.
Now that we have profits, here's how to properly pay yourself with them. Here’s how business owners should be paying themselves with their QuickBooks bank account.
To pay yourself, you just transfer it between accounts.
You can also write yourself a check, but transferring money with online banking is faster and easier. And if you have a bank account with QuickBooks, it’s even simpler:
- Click “cash flow”
- Click “banking”
- Click “transfer”
- Select the account where you want to transfer the money
- Enter the amount and move the money
- Label the transaction as an “owner’s draw”
Once the money is in your personal bank account, you can spend it on items not related to your business.
But what about taxes? Is it going to cost me every time I transfer money to myself?
The short answer is no. The IRS looks at you and your business as one entity, so you can transfer money as many times as you like between your business account and your personal account without incurring penalties.
Simple as all this sounds, the smartest thing to do here is to hire a tax professional to file your tax returns for you to make sure everything is done properly. There are a lot of industry standards— easy for the untrained eye to overlook—that can save you a fair amount of money. Ultimately, spending a little extra to potentially save a lot is the way to go.
Like I said earlier—learn from my mistakes!
Thank you for reading this blog post on opening a business bank account with QuickBooks and paying yourself using an owner's draw. I hope this information makes managing your business finances easier. If you haven't tried QuickBooks yet, I encourage you to give it a try; there’s a reason why I recommend its many features and benefits!
Be good to future you.