Why It’s Important to Keep Separate Accounts for Business Transactions

While it may not seem it like at first, it’s extremely important to keep separate accounts for business and personal transactions. In fact, it’s recommended that you open a small business account before opening your doors to the public.

A business checking account is simple to open. Many financial institutions have affordable minimum deposit requirements, in the $25 to $50 range. This helps to ensure that there won’t be any “money mix-ups” in the future. Below are some of the reasons why it’s best to maintain separate accounts.

1. Protecting Personal Assets

If you choose to operate a business, such as an LLC, S Corporation, or C Corporation, separate accounts prevent you from becoming personally responsible for any unpaid debts your business may rack up. When the court system can’t distinguish between personal and business finances, chances are that personal assets will be seized to pay off the debt. Taking the time and effort to open a business account might save you from a devastating situation in the future.

2. Prepares you for Tax Season and an IRS Audit

Maintaining separate business and personal accounts help you survive the hectic tax season. Not only that, it also saves you time and money. If all of your finances are jumbled together, it makes it that much more difficult to sort things out for tax purposes. In addition to that, if you were to ever be audited by the IRS, maintaining a separate business account is evidence to the IRS that you have a legitimate business. You don’t want to go through an audit and have the IRS disallow your business deductions because they do not believe that you truly have a business.

3. Building Business Credit

Building business credit may not be something you think about right away. However, it’s very important to do so, especially as the business grows. A business credit card gives you more borrowing power.

In the event that your personal credit score is low at the time you’re starting your small business, don’t give up. There are many ways to raise your score over time. You just need to be patient. Once you qualify for business credit card, you’re able to deduct the interest as a business expense.

One way to build your personal credit score is to apply for a secured credit card. With a secured card, you deposit money in a savings account equal to that of the credit card limit. Since most of these cards report to all three credit bureaus, timely payments help to boost your score.

4. Creating a Professional Image

In order to start and continue building a successful business, a professional image is a must. First and foremost, it gives your customers a sense of security. Many people are leery of writing checks out to an individual, as opposed to a business. Separate accounts also minimize the possibility of creditors making a claim against your personal assets.

Now that you know the main reasons for keeping your small business transactions separate from your personal spending, your business has an even better chance of succeeding. Unfortunately, there’s a lot of competition out there. So, you need to do all you can to stand out among the crowd.