You've begun your own business, and now you are wondering: should I have a separate checking account for the business?
If your business is a sole proprietorship (a business not separate from you, the owner), you may be able to combine your personal and business checks in one account. However, you will need to keep excellent records in order to differentiate your personal expenses from your business expenses. Make sure no personal expenses are claimed as business expenses. For any other type of business (and according to most experts, for sole proprietorships as well), you should maintain a separate checking account. Here are some reasons why a separate checking account is a good idea.
Appearance is Important
Perception is important to the IRS, and you want your business to appear professional and "real." The IRS looks closely at tax schedule c documents (filed by many small businesses), particularly if you report a loss. Maintaining a separate checking account is an excellent way to give your business more credibility in the eyes of the IRS.
In fact, IRS publication 583 specifically advises small business owners to open a separate checking account for the business.
Creating a "Corporate Veil"
You want to protect your personal assets from corporate debt liability; this separation is known as a "corporate veil." In case of a lawsuit, you would need to be able to prove that your business is "real" and not just a shell created to avoid financial responsibility. The best way to avoid the piercing of this corporate veil is to incorporate your business, and to create a separate checking account as a step in further legitimizing your business. Having a separate account could also help protect your personal assets in the event of a lawsuit.
Hobby Verus Business
Creating a separate checking account helps identify your business as just that: a business, not a hobby, both in the eyes of the IRS and your customers. Why should you care whether the IRS views your endeavor as a hobby instead of a business? One big reason is that losses from a hobby are not tax-deductible, while losses from a business are. A separate checking account clearly defines your venture as a business, not a hobby.
Easier Record Keeping
A basic reason for maintaining a separate checking account for business finances is that it results in easier record keeping. When personal and business expenses are commingled in a single account, separating out business from personal at tax time can be cumbersome and time-consuming. Separate accounts lead to easier record keeping. They will also make a possible IRS audit much easier to prepare for.
Opening a checking account may result in fees, but these can generally be written off as business expenses at tax time. The legitimacy a separate account gives your business is worth the effort and expense it may cause.