Reasons to keep your business banking separate

Many new business owners may be tempted to combine their personal and business banking. Most of the time business owners do this, for convenience, since it means that you won't have to go to the bank and open all new accounts. However, while this can seem like a simple solution, the reality is that it can create serious problems down the line. Business financial experts recommend that you should actually keep the money physically separate in different bank accounts, one set up as a business account. Some business owners even use different banks, for their business and personal accounts in order to avoid inadvertent transfers of funds.Here are just some of the reasons to keep your business banking separate-

• It helps create clean and accurate bookkeeping-Just imagine how hard it will be to keep everything straight, if you mix your business and personal transactions. Over time the problems would just get worse. Then think about what you would have to deal with at income tax time, if you mix your personal and business finances. The bottom line is that no one wants to deal with that mess. In addition, if you have a separate account, for your business transactions, then you have a clean record to give to your accountant at the end of the year. All you need to remember is to keep all your invoices and receipts, to match up to your checkbook and bank statement entries, and you will be in good shape when income tax time rolls around.
• It helps prove that your business is not a hobby. The Internal Revenue Service (IRS) will be very interested that you are being able to show that your business is really a business, and not a hobby. You should remember that you have to show a profit on Federal Tax Form Schedule C three years out of every five. If you have losses that you deduct from your income over three consecutive years, then the IRS may decide you are conducting a "hobby business." You may be inviting an audit. Keep in mind that even if you pass the "3 out of 5" rule, you are not necessarily safe from an IRS audit. You can further prove you are a business and not a hobby business, if you have a separate business bank account, business cards, or a well-maintained set of business books.
• It shows professionalism-You always want the appearance of professionalism by your business, and taking this step does that.If you keep your business finances separate from your personal finances, this can enhance your image of professionalism. In addition, it means that when you write checks to suppliers, they see that those checks are coming from a real on-going business concern. Also, if you pay taxes, the IRS sees that the tax payments come from a real business.
• It is required for incorporated businesses-Separate business accounts, are required by the IRS if your business is incorporated. It is important to understand that it doesn't matter if your business is a corporation, or a partnership, or an incorporated sole proprietorship. The bottom line is that if you are incorporated, you must have a separate account.
• It provides a clear audit trail for the IRS-While no one hopes to be audited, this can help if you are. There is always that chance and if that happens, it's not the end of the world, as long as you have clean recordkeeping, and a separate bank account. You will also need to be sure and keep all your invoices, and expense receipts, as backup material.