One of the most important things you can do for your home business is to keep it separate from your personal expenses. Here's what you need to know about getting a separate bank account for your home business.
When I finally got around to setting up my LLC, my accountant made it clear that I should also open a business account. I thought it was kind of silly. After all, the money I make all goes to the same place: The joint account I have with my husband. The accountant was clear, though, that it would be to my advantage to set up a separate account for my home business.
Keeping business and personal separate
The point of having a separate account for your business is to ensure that your business expenses are separate from your personal expenses. It's a good way to invest in your home business. Back in the days when I operated as a sole proprietor, I didn't think about it too much (although, really, I still should have had a different account for business). However, it is important to ensure that you keep things separate.
Separating your finances can help you create better records that can support you in the event that the IRS comes knocking. The ability to quickly and easily show your business income, by what comes into your account, and your business expenses, can be a real help. It keeps you on track and helps you avoid some unpleasantness that can come with a tax audit. When you set up separate accounts, you quickly and easily establish which expenses are for your home business and which are for personal purposes. At tax time, that's an important distinction.
Setting up a Bank Account for Your Business
Depending on the bank you use, you will need different items to set up your account. Generally, though, you can expect to bring in the following items when you set up a business bank account:
- Photo ID
- Business license
- Your EIN from the IRS
- Proof of address
Call ahead of time, though, to ensure you have all the documentation and information you need.
Do some homework as well. You'll want a bank that doesn't charge checking account fees for your business account. Many banks offer small business accounts that are truly free, without minimum balances or activity requirements. Look for a bank that provides you with these services. It can also help to find a business bank account that offers good personal service. Perhaps it comes with a business credit card that can help you build your business credit.
I like to have my business account linked to other accounts. I have a Health Savings Account set up in my business name, and I have the account linked to my checking account. This way, it's easy to have money deposited in my business account and then transfer it instantly to my other accounts. Adding the extra step seems a little weird, but it works and establishes the business income. I always leave some money in the account, though, so that I can use it to make business-related purchases.
After a while, you start to feel a rhythm to how your money moves through your financial system. If you connect your business account to a personal checking account at the same bank, transfers don't need extra time.
However, if your business account and personal account are at different banks, and you need to “pay yourself” by writing a check, or transferring money, it's important to factor in the extra time. Once you get your system down, having two different accounts no longer seems superfluous; it all starts to flow naturally.
I completely agree with your accountant, the other part of shopping for the business account is to find a Credit Union that offers free checking. Credit Union’s are generally going to be better since their profit goes back into the members.
Thanks for the reminder about credit unions. Plenty of them also charge lower fees and offer better interest rates on loans.
You can also set up an account even if you don’t have a business license or EIN. Just by using your personal name/social and using a DBA (Doing Business As). This is especially nice for freelancers and sole proprietors.
Thanks for the tip, Carrie! Since I wasn’t smart enough to set up my account before I did the LLC thing, I didn’t realize that was an option.
When coaching clients, I see mixed business and personal accounts often and it’s a huge mess to untangle. I agree 100% keep the business and personal accounts separate.
I think in CA, I had to show my fictitious name statement for setting up DBA, but that was a few years ago.
I think it’s important to contact the bank ahead of time, because different states require different items for identification and business verification. Calling ahead can help you know what you need, in terms of bank expectations and state law.
You can also set up a business account as a sole proprietor. Basically, you only need to form an LLC if you think you may be sued. IF you might, LLC it… if not, go the sole route and keep your taxes simple.
I learned the same thing when I formed an LLC. When I first started online it was more of a hobby and I used my personal banking account, but when I decided to get more serious I realized I needed a business account. It adds a step when the time comes to pay myself as I have to transfer from personal to checking account, but it is better to have them separate.
I never thought of opening a separate account for my blogging, however, no big deal, I haven’t received any money YET, so I will just open a new savings account with ING Direct (this is where my savings accounts are as well as a checking account). Once it deposits into my business account, then I can transfer real time to my checking with no sweat. Thanks for the post! Great info.
Jeremiah Brown
financeyoga@gmail.com
http://financeyoga.com
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My accountant told me that it’s always a good idea to open a business checking account. I think she’s right because we need to keep the business income separate from mine. Thanks for sharing that separating my finances would help me to keep things organized so I’ll find a company that has a good reputation and I’ll open an account with them.