It’s a common mistake many owners make when they establish their businesses. Then they get busy, overwhelmed, or both, and they don’t fix it.
What is that mistake? Failing to establish separate business and personal bank accounts.
According to a new survey and white paper by Manta and Nav, nearly one in five business owners (17.71 percent) surveyed do not have separate personal and business bank accounts. More women than men reported not separating the two: 21.88 percent of women surveyed said they had not separated their business and personal bank accounts, compared to only 15.43 percent of male business owners.
Why is it important to establish business accounts apart from your personal accounts? Here are five reasons:
1. Smoother sailing at tax time. Filing taxes can be complicated and stressful for small business owners, and those who aren’t well organized will find it even more challenging. If you work with a bookkeeper or accounting professional, they no doubt would prefer you keep separate business accounts. It makes it much easier to identify which purchases and deposits are business related and which are personal. Try to figure that out in April and there is a good chance you will miss out on some valuable tax deductions. Even worse, imagine getting audited and trying to dig up receipts for all those transactions!
2. Protect your investment. If you’ve formed a corporate structure for your business, then no doubt asset protection is one of the benefits you hope to enjoy. You don’t want potential lawsuits or debts from your business to put your personal finances at risk. But if you are mixing business and personal expenses in the same account, you may be at risk of a creditor with a claim against the company “piercing the corporate veil.”
“One of the requirements for an LLC or corporation is that you have to have a separate business bank account,” warns Garrett Sutton, a business and asset protection attorney and author of Start Your Own Corporation. “Commingling business with personal in one bank account allows a creditor to assert that you didn’t follow the formalities and hold you personally responsible for a claim against the business.”
Your incorporated business is a separate legal structure and you’ll want to make sure it has its own business bank account. (And ideally, get a business credit card as well.)
3. Maximize financing opportunities. Some types of small business financing will require you to provide information about your business cash flow, either in the form of account statements, or by giving permission for the lender to access information from your accounts. If you can’t document business revenues, you may lose out on certain financing opportunities. “It’s a common hurdle,” says Ben Westerman, credit and lending manager at business and credit marketplace Nav (where I work).
The most obvious type of financing based on revenues is merchant cash advances. But other lenders, including banks and credit unions, may look at that information as well. And some credit scoring models, including the FICO SBSS score, may incorporate that type of information. Plus there’s a potential upside to a separate business account: if your business bank account shows your business is solidly profitable, your financial institution may reach out to you with a financing offer.
4. Take your business temperature. Ideally you’ll have a business accounting system that will allow you to continually monitor the health of your company finances and make short- and long-term plans. But even a quick glance at your business bank account balance can help you get a sense of where you are at. Dwindling balances? Time to make some sales or collect outstanding invoices. Bulging bank account? You may be able to consider that computer upgrade you’ve been wanting to do. (Your bank account balance doesn’t reflect payments that may come due in the future, so don’t rely solely on that to make financial decisions.)
On the flip side, if you’re running everything through your personal accounts, you may not even know if your business is profitable, or hemorrhaging money.
“By mixing personal finance and business finance, its harder to have a clean financial picture of the business, and figure out if money is tied up in personal or business assets,” says Sabrina Parsons, CEO of Palo Alto Software, maker of LivePlan.com and Bplans.com. “In order to keep an accurate pulse on the health of your business, owners should establish a business credit line separate from their personal. Starting a business tied to a personal account can make things complicated, especially when a partner is involved and it comes to ownership and investment.”
5. Protect your life from your business. It is easy to focus on the business benefits of keeping a separate business account, but there are personal benefits as well. For one thing, it’s much easier to budget when you actually know how much of the money in your bank account is available to pay your expenses, rather than those of your business.
And if you think getting a mortgage is tough these days, try getting one when your business and personal expenditures are mixed together on the same bank statement. “Separate accounts will greatly simplify documenting large deposits or expenses that can affect your mortgage approval process,” says Joe Kelly, president of national mortgage firm ArcLoan.com. “This affects both your assets and income used for mortgage qualification!”
With all these advantages, it makes sense to take the time to open a business account with a bank or credit union. Whether you decide to keep your personal and business accounts at the same financial institution is up to you, but make sure your business has its own account.
As Sabrina Parsons points out, “Business accounts protect both you and the business.”