You decided on a business.
You got your website.
You set up your social media profiles.
You obtained your EIN.
Did you open up a business checking account yet?
If you didn’t form a business, why go through the hassle?
It’s true–you can run your business and your personal finances from a single account.
Assuming that it’s a sole proprietorship.
Some “experts” say that having another account means more work.
And then there’s the fees associated with business checking accounts.
You still should be separating your business and personal money!
Why?Freelancers often wonder why they need to have separate bank account for their business.Click To Tweet
1. It Helps Psychologically
People love segregating their money for different needs and wants.
They open bank accounts for different purposes like vacations and holiday gifts.
They stuff money in envelopes labeled for specific purposes.
It’s a psychological technique that helps them reach specified financial goals by preventing the robbing Peter to give to Paul.
It makes sense that by having a bank account specifically designated for business purposes, you will use that money solely to operate your business.
It’s the exact same reasoning for having separate pots for personal goals.
Having a clearly defined business pot, follows that same logic.
You will be less likely to raid the business to pay for personal expenses, keeping that money where it belongs.
Should you need money to cover personal expenses at some point, you will simply take a draw.
After all, that’s how you’re supposed to take money from a business.
And, from all of the blog posts on the subject it would seem that not only do people need to use psychological tactics to manage money, many find success in it.
So if psychology works to save for emergencies or specific purchases, what’s the big deal about employing such techniques to keep your business and personal funds independent of each other?
2. Separate Business and Personal Accounts IS Easier
But, if there are more accounts, how is it easier?
There are some people who say that there is no need as having multiple accounts is too difficult to track.
Maybe for an old indie/hippie lady that’s true.
Well, for starters, everything is easier to keep track of.
People who are completely useless at keeping track of their finances have a built-in method of keeping business and personal money accounted for in each respective account.
All of your transactions will be organized.
You won’t have to sift through every single transaction to find a specific one when needed.
If you’re the type of person who is clueless about accounting systems (in which case you really should hire an accountant), you’ll at least have some distinction between your personal and business stuff.
If you want to see how your business is performing financially, there aren’t a bunch of non-business items to fudge the figures.
If you want to see how your household budget is faring, your business transactions won’t get in the way.
A place for everything and everything in its place, as the saying goes.
Technology makes it even easier to manage multiple accounts.
Most banks allow for simultaneous log-in, meaning you can have both your business account and personal accounts accessible without having to remember additional passwords.
Plus, taking a draw is only a few mouse clicks away and instantaneous as well!
3. You’ll Save On Accounting CostsHaving a separate business bank account actually REDUCES accounting costs! Click To Tweet
That’s assuming you actually have an accountant, because, you know it makes more sense to spend your time on revenue-driving activities.
The more work your accountant has to do, the more it will cost you.
It’s a simple equation.
If you’re all up in arms about paying the bank fee, imagine how you’ll feel knowing how much you have to spend just for your accountant to sort through all your personal stuff to find the business transactions.
The same holds true for those of you who employ freelance bookkeepers to come in and keep the books.
At $25 or more per hour, if you can cut their service by just one hour you can more than recoup the fee for a business bank account.
Who doesn’t like coming out ahead while still getting everything done?
Oh, wait, that’s right , there are still free business checking accounts being offered.
Guess that eliminates the talk of fees.
And that means you keep all of the savings in the business by reducing the amount of accounting work you pay others to do!
4. Your Private Spending Will Remain Private
You’re not forced to acquire an EIN for your sole proprietorship, but it makes sense to do so.
Because you won’t have to give out your social security number, which gives you an added layer of identity protection.
The same goes for having a separate business bank account.
By having a separate account, you are only giving your accountant access to that part of your life.
If you have to provide bank statements to a credit card company, or get audited by the IRS, you only have to supply the business info (in most cases).
You don’t have to worry about anyone seeing or judging how you spend your personal money.
Who cares if you like to visit swinger clubs?
Want to crossdress at home, who cares?
Have a video game habit, pssht!
After all, it really isn’t any of their business to begin with.
5. It May Help You With The IRS
Not everyone gets audited…in fact only a fraction of the populations does, but anyone can be subject of inquiry.
The IRS tends to examine sole proprietors who file Schedule C on their 1040 more closely.
The reason is simple–there’s no distinction between business and individual.
It leaves the door open for both honest mistakes and purposeful deceit.
Using a separate business bank account at least gives you a bit of insulation.
By limiting transactions to their respective accounts, you can show due diligence in case of audit.
Making an effort like this can be the difference between an agent finding you guilty of fraudulently passing off personal expenses as non-deductible business expenses or making an honest mistake in using the wrong account.
Using separate bank accounts also makes life easier for the auditor.
In turn, it makes life easier on you as well.
Rather than having to through a years worth of transactions in a single account, the auditor’s job is made easier by limiting the info they have to dig through strictly to business transactions.
This speeds up the audit process.
And who knows, if you make things easy for them they make make it easy for you and simply overlook inconsequential mistakes.
Look, everyone has to make up their own mind on the subject.
Are you required to have a separate account for a sole proprietorship?
Does that mean you shouldn’t have one?
Just because it’s not the a requirement, doesn’t make it a bad choice.
After all, I just laid out 5 pretty good reasons to get one.