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.