What’s the Big Deal about Bank Accounts?

Every accountant will tell you the same thing:  “Don’t comingle your funds” (which is accountant lingo for ‘don’t mix your business and personal money’), but I don’t often hear them explain why.

If pressed, they will usually talk about audits being worse, LLC protection voided, and complex things that like.  And while those are absolutely true, there are some equally important reasons that you should want to separate out your money.      

This is a parenting strategy that works well in my family -just don’t tell someone NOT to do something, but if you explain why and help them to understand why it’s important, it’s easier to comply or make it a priority.  

{important note – this works great with my 10-year-old.  My 3-year-old, nope. 🙂 }

3 (super compelling) reasons you MUST separate your business and personal money.  (that even my little Scarlett wouldn’t ignore)

1. You will never have clarity on your numbers 

If you have a bank account that has your business income going into it, along with your partner’s payroll check, and then you are paying your VA, Zoom subscription and also for your groceries out of that account, then it’s no wonder you are very unclear about your numbers for your business and personal needs. It’s going to be super hard to determine what your business needs to set as it’s sales goals and how much you need to pay yourself as CEO (2 super important numbers you need to know in your business) if things are all mixed together.  

2. It’s a pain in the ass to do your bookkeeping 

Whether you are doing your own bookkeeping or have someone helping you with it, having things mixed together is going to make your bookkeeping really suck.  And that’s going to cost you more to pay someone else to do it, or probably make you want to avoid it completely. (and then see #1, you will never have clarity on your numbers!) 

3. You are likely overpaying your taxes

When your money is all jumbled together, the chances of you having clean reporting of everything you spent from your business in a given year are not great. That’s going to lead to you missing out on tax deductions you could have taken and then you will pay more than you have to in taxes.  And I have never met anyone who voluntarily wants to pay more than they need to in taxes, and I doubt you are the first.  

While we are here, let me explain the legal and audit side of things that accountants love to talk about so I have covered all of our bases.  

If you have an LLC and you have your funds all mixed together, there are 2 potential issues that we see:   

If your income & expenses are mixed together in your bank accounts & you have a legal issue where they subpoena your records, they could nullify your LLC and say you aren’t running your business like a business so it’s not a business – and therefore you don’t have any of the protection you thought you had. Ouch. 

If you have an account you are using for the business that’s not in the name of your LLC/Corporation, then you also don’t have any of the LLC protection on those funds because those assets aren’t in the name of the LLC, they are considered your personal assets. (Even if you had things separated out and not mixed together…you have to have the LLC name on the account!)    

Bottom line:  It costs money to set up your LLC and maintain it each year – so just skip that cost if you aren’t going to have separate bank accounts.   

How about audits?  

If you were to get audited (the chances of which are very low, but it does still happen) and your money is all mixed together, it opens up some potential issues.  Usually, when the IRS audits you, they’re coming in with a question about one or two expenses on your tax return.  You answer them, they (mostly) go away. Most of the time it’s very easy to resolve.  However, when they request your records, if all your stuff is all mixed up, they don’t even have to ask they can just go through and audit everything, business and personal.  So you are opening the door for a much larger scale audit by having your money mixed together versus if you just say, here’s my business records, here are the things you’re looking for, the end. 

OK – did all of that fear motivate you enough to make some changes?   🙂  Great, here are some easy steps you can take today to get things sorted out.  

Take Action Today:

Set up a separate bank account for your business.  

If you are an LLC, this has to be a business account, in the LLC’s name.  If you aren’t LLC this can just be a separate personal account that you use just for your business. 

Use a credit card that’s just for the business that’s separate from the ones you use personally.  The name on your credit cards doesn’t matter as much, more important that things are separated out. 

Don’t forget about PayPal – you need to have a separate business and personal account with them too, attached to only your business bank account/credit cards.   

If you need to move money between your accounts, that’s totally fine and very common.  Just make a cash transfer from your personal account to your business account, pay your business bills out of your business account.  Don’t pay your business bills directly from your personal account, that’s where you will have the issues!

Need help getting started with this?  Our Empowered Essentials program covers this and much more about the financial foundation you need to have in your business. We would love to talk with you and see if it would be a good program for you to join – book a call with our team to learn more! 

This is provided as information only and as a starting point for a conversation with your own legal and accounting team, this should not be considered legal or financial advice.  All of these decisions are based on a number of factors and we cannot guarantee that you will experience any specific results based on any information provided. Please speak with your own retained professionals to ensure that you are making the best decisions for your business & personal situation.

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