5 Reasons Not to Mix Personal and Small Business Banking

Customer signing paperwork with bank manager
Image Source/Getty Images

One of the basics of operating a small business is setting up a business bank account. This fundamental business function is often ignored by new and part-time business professionals who co-mingle personal funds with business funds. Most notably, co-mingling funds is common among part-time businesses like multi-level marketers and self-employed sole-proprietors such as realtors and consultants.

Even business owners with a small staff often try to process business transactions through their personal bank accounts in order to reduce expenses and bank fees.

If you fall in any of these categories, you may be creating potential problems for your business in the future. 

What follows are five reasons for separating your business bank account from your personal bank account, even if you're a sole-proprietor working part-time.

1. Hobby Business Classification

According to the Internal Revenue Service, only businesses can deduct business expenses. And, there are specific for determining whether an entity is a business or a hobby. If the expenses you incur running your business go through your personal bank account you may be giving the IRS the impression that your business is actually a hobby. And, if you're audited, you will have a hard time convincing the government you're actually operating a business.

2. Tax Time Nightmare

When tax time rolls around and you have to declare income and expenses related to your business, all of your personal transactions will have to be separated from your business transactions.

It will be a time-consuming nightmare if you have to go through every transaction and receipt (down to a $10.00 cab ride) in order to separate business from personal.

3. Limited Audit Trail

The U.S. government doesn't require you to have a specific recordkeeping method or separate bank account for that matter.

However, it does require that whatever method you use, all records are accurate, complete, permanent, and show a clear record of income and deductions. Providing a separate business statement and record will provide a clear audit trail.

4. Missed Deductions

Co-mingling your small business banking with your personal banking creates a confusing mix of transactions on your account statement. The worst part is that it's easy to overlook deductions you may be entitled to. Whether you prepare your own tax return or use an accountant, messy record keeping will cost you time, money, and possibly missed deductions.

5. Lack of Professionalism

If you have clients that you write checks to, writing a check using your name as opposed to your business signals that you're not a serious business venture. Even if your business is part-time and you work from your home, take your work seriously and your clients will too.

Take the time to open a small business banking account to simplify your record keeping and life. Small business banking fees and features vary by financial institution, so shop around for the best deal. Whatever the cost, the benefits to your business will far outweigh the cost of opening a business account.

Plus, business bank account fees are partly tax deductible as an expense. You also might want to consider that your business will grow in the future, and this way you'll be prepared.