We’re heading into April, also known as “The Month That Taxes are Due.” For some of you who run your business through your personal account, you may be hating your life as you weed through your personal and professional financial activity, trying to squeeze the most juice out of those write-offs.
It’s quite common to start a business, or to start freelancing, and continue to use your same-old checking account as your operation grows. But at some point you are going to need to set up a bank account in the same way you’ll eventually need to form an LLC. The difference here is that you can open a business account as a sole proprietor, and there’s no financial reason not to (ahem, Seed doesn’t charge a monthly fee).
Let’s take a look at some reasons why it’s a good idea to keep your personal and business transactions separate with a shiny new bank account.
The Tax Man Cometh
Creating a separate business account makes doing your taxes as a freelancer or small business owner way easier. For one, you get a debit or credit card that you can choose to use only for business purposes. This will make writing off whatever you can from this account a simple task when filing your taxes. Also, if you get audited, it will be much easier to prove that certain expenses were legitimately made for business purposes only.
Protect Ya Neck
If you do have an LLC or some form of corporation, keeping all your business expenses on one account is an added layer of legal protection (not to mention that you need to have a separate account to be incorporated in the first place). But commingling personal and business finances can expose you to risks in the event that things go south with a client, a customer, or anyone else with a lawyer out to get you. If you have a dedicated business account, your personal wealth is that much more separated from whatever you do in your professional pursuits.
OK, maybe not instant credibility. But running everything through an account with your business’ name looks better to the outside world. If you’re a sole proprietor, you’ll at least need to get a DBA to do this. Whether your cutting a check or receiving one, you are going to seem more legit if your business name is on the paper — or the wire transfer. With the amount of competition in just about any creative market, companies these days expect a certain level of professionalism. You wouldn’t pitch someone from a Hotmail address. Why invoice them from the same account you use to buy underwear?
Prove Your Business Isn’t a “Hobby”
The IRS is very interested in whether or not your business is a “hobby.”. Basically, if you aren’t turning a profit after a few years but claiming that you’re a business, they might ask you to prove that you are one (more on this in a future post). However, one way to help make your case is to show that you’re a bona fide operation. If you can’t and you are classified as a hobby, than, among other things, you can only deduct expenses amounting to the profit your business made. Ouch.
Keep Better Books
If all your business finances are in a dedicated account, you will also benefit from quick, easy, and accurate reporting on your expenses, profits, and losses. It’s a pain to export your personal expenses to a spreadsheet and parse out transactions appropriate for a report; even if you use some form of accounting software, it’s still an added layer of work. Seed can generate great reports for your operation, and if you only use your account for business, accurate and helpful data on how well (or poorly) things are going can be just a click away. Seed also lets you pay bills to vendors, contractors, and everyone else with ease.
April’s nearly here, after all.