As potential business owners and start-up owners, you probably have gotten advice that you should keep a balance between your personal life and that of your business. You should keep the two separated and devote time to developing relationships, travel and fitness. Not heeding this advice to keep a balance in life basically means “all work and no play, makes Sue a dull girl.”
The balance theme can also include keeping your company’s finances and your personal finances separate. I often tell my students to use a business account from the outset of the business and not to use their personal bank checking account for the business. You can run into trouble doing that.
Let’s look at the potential problems:
- Combining business and personal finances in one account can lead to inaccurate cash flow reporting, as well as miscalculated tax write-offs.
- The inability to access credit card processing systems, as personal accounts cannot tie into card processing systems.
People who often run into trouble are those who file IRS Form 1040 Schedule C, which is for self-employment income. Schedule C files are more likely to be audited by the IRS which can become a nightmare when funds and receipts are unorganized.
To open a business checking account, you would apply for a federal tax ID number for you company. The only time when you would use your personal account is when you open that business account or if you must lend money to your business.
Of course, we all may feel that having one account at the outset of the business can minimize upfront startup costs, but eventually depending on the startup and the capital infusion, we are eventually going to get to the point where it becomes essential to have to separate accounts.
When we open our business as a corporation we believe that our assets will be protected. However, if the company is sued, whoever sues the business may be able to “pierce the corporate veil,” and be able to reach the owner’s private assets, a situation we thought we could avoid by forming a corporation.
One business partner may feel that the other partner who uses his personal checking account for the business may be using company funds to pay for personal expenses. And then you are in an uncomfortable situation, and a forensic accountant will have to come in to determine what the business expenses are.
Here are some words of advice, if you co-mingle your business with your personal account, review what you have, and open a new account. And if there is any unravelling to be done, hire an accountant to help you out immediately.