One of the first things that I do when I begin working with a mamapreneur is to help them establish a strong business foundation. The first area that we address is their legal and financial foundation. For many of them an early question is, “Do I really need a separate bank account for my business?” My answer is always a resounding YES!
As mamapreneurs get started they are often only working with the funds that their family can contribute. They typically begin as a sole proprietor (this is the default business entity that you are in when you start a business for yourself) and so all money that goes into and comes out of the business goes through their bank account. They often look at a separate bank account as an extra step that they have to take which is just going to complicate their bookkeeping and add time that is already stretched thin to their accounting. And, legally, if you are operating as a sole proprietor under your name only then you typically aren’t legally required to have a separate bank account (confirm with your accountant or lawyer to confirm this). But I recommend that even women operating in this way need a separate business bank account. And women that are operating as other legal entities like LLCs or corporations definitely need a separate account. Here are six reasons why.
1. Saves time, stress, and money
A separate business bank account saves you time, stress, and money in that you don’t have to consider whether a purchase is for personal use or business use — everything is for business use. You don’t have to stress that an expense got classified wrong or that you can’t pay your power bill because you accidentally used the money in your checking account on your business that was supposed to go to your personal bills. And you save money by providing your accountant with clear and concise records at tax time which makes their job easier and results in a lower bill for their services.
2. Reduces your personal liability
With a separate business account you reduce your personal liability (the amount of money that you could be personally liable for in the event of a lawsuit). If your business and personal expenses aren’t co-mingled in one account then it is clear what assets and liability your business has thus not making you personally liable. When your business and personal finances are intertwined it’s typically called “piercing the veil” and is something that you definitely want to avoid.
3. Reduces tax complications
As a business you are entitled to certain IRS business deductions such as business use of your home, mileage reimbursement, etc. However, if the IRS comes to audit you and sees that your business and personal finances are operating out of the same account, it is possible that they could decide that your business is actually a hobby and that you don’t qualify for business deductions.
4. Establishes yourself as a professional
While we are taught from an early age that it’s not what others think about us that matters, in the business world this is less accurate. Your professional appearance is valuable and will impact the success in your business. Having checks, debit cards, and other professional accounts allows others to recognize that you are serious about your business.
5. Satisfies legal requirements
The legal requirements for having separate business and personal accounts might differ based on the different types of business entities or your state, but I always lean towards being better safe than sorry. And the majority of business entities require you to legally have a separate business account.
6. Shows you an accurate financial picture of your business
Whether numbers are your thing or not, as a business owner you need to be able to get an accurate snapshot of your business’s financial health at various times. With a separate bank account it is easy to see whether your business is profiting or suffering from a loss and allows you to allocate your resources in a worthwhile manner. With business and personal expenses in one account it will take you much longer to accurately judge your company’s financial health which means you’ll do it less often which can be very detrimental to your business.
These days getting a separate bank account for your business is not only the smart choice but it’s fairly painless. It is usually simplest to call your personal bank and create a business account there as well. Most business accounts are free these days without fees and if your bank is not offering an account like this then find a bank that will!
Please remember that I am not a financial or legal advisor. All information that I offer is based on my own experience and is not to be taken as a replacement for consulting a financial or legal professional. Remember that all advice, articles, and education that you see online pertains to a specific type of business in a specific environment and you could always consult with someone familiar with the laws, guidelines, and best practices of your industry as well as being familiar with your individual company.