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Jean   Murray

Do You Need a Separate Business Checking Account?

By August 21, 2009

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You have probably heard before (at least you heard it from me) that you must have a separate checking account for your business and personal banking.   Some tax professionals agree with me; some don't.

June Walker (June Walker Online) says you don't need a separate business checking account. In fact, she says it's easier without it.

The Wandering Tax Pro Robert Flach says you DO need a business checking account

And The Tax Lawyer's Blog says mixing up personal and business checking accounts is a really bad idea because it can bring you liability problems related to "piercing the corporate veil." (More about that in a minute).

Who is Right?
They all are.  In this question, I think the varying points of view come from differences in perspective.  Here is what I mean:

June Walker is talking about independent professionals who are set up as sole proprietors.  At least, I think this is what she is discussing.  In that case, I agree that it is difficult sometimes to separate business and personal funds, because you must make payments from your personal account to your business account and your purchases may be mixed up between personal and business purposes.

The two tax attorneys (Wandering Tax Pro and the Tax Lawyer) are talking more about corporations and limited liability companies.  In both of these cases, you need a separate business checking account, for several reasons:

1. To let the IRS know you are a separate business entity, so they don't look on your business as a hobby.   Depending on the type of business you are running, this may or may not be a big issue.  But why take a chance? If you read my blog post from yesterday, you can see that the IRS wants you to show you are serious about making a profit.

2. To maintain the integrity and separateness of your business from your personal life.  In the case of a corporation in particular, the Tax Lawyer is right; if the corporation is sued, and you cannot show that your corporate and personal business are separate, you can be sued along with the corporation.  This is what he means by "piercing the corporate veil."

What Should  You Do?
My suggestion (and remember I'm not a CPA or an attorney): If you are a sole proprietor, having only one checking account is not a problem as long as you can keep your business and personal records separate and be sure you are not recording personal expenses as business expenses. If you are any other kind of entity (LLC, partnership, or corporation), get a separate checking account.

Tomorrow, I will talk more about ways to keep your business and personal accounts separate, with one checking account or two.

Comments
August 22, 2009 at 12:51 pm
(1) Robert D Flach says:

JM-

For the record – I AM NOT A LAWYER OR A CPA EITHER! I am a professional “unenrolled” tax preparer who has been preparing 1040s for individuals in all walks of life since February of 1972.

While it is absolutely necessary that a corporation or an LLC maintain a separate business checking account, I also strongly feel that it is a good idea to have a separate business checking account even if you are a mere sole proprietor – a freelancer or “indie” – filing Schedule C who has not registered the business as an LLC.

Check out the comments to my TWTP post “Why Can’t We All Just Learn to Get Along” at http://wanderingtaxpro.blogspot.com/2009/08/why-cant-we-all-just-learn-to-get-along.html.

TWTP

August 24, 2009 at 12:09 pm
(2) biztaxlaw says:

Thanks for the clarification and I apologize for mis-stating your professional credentials. I agree that a business checking account is preferred, particularly for those sole proprietors who may be questioned about their “hobby” status.

August 25, 2009 at 9:14 am
(3) Neil "The Tax DudeŽ" Johnson says:

While June Walker is technically correct about sole proprietorships not needing a separate checking account for business, advising someone not do have separate accounts is reckless. Her point regarding bank fees makes sense, except there are free checking accounts available for small businesses.

Kudos to tax professionals who have identified some of the legal and IRS exposure of not having a separate bank account for a business. The risks associated far outweigh the potential for (often annoying) bank fees.

October 20, 2009 at 8:56 pm
(4) Phil says:

I have an LLC for my rental property and have always kept a separate business checking account for it. But I need to switch to a new bank and they do not offer business accounts. Is it OK to have separate accounts even if they are both technically “personal”? I would be using one for business transactions only of course.

January 14, 2010 at 2:22 pm
(5) Becca says:

I have a full time job AND do some consulting work and tax prep on the side. I only have one account, because I really don’t have a lot of expenses (as a service entity), am a sole proprietor, and most of my clients will pay me (in my name) rather than a busines anyway. The key for me is that I use Quicken to track all my financial activity, and so I am constantly tracking business versus personal purchases. I keep all the business receipts. When deposits are made, they are also designated as either business or personal. In 10 seconds I can run a report which shows all my business activity separately, even though the bank account is the same.

The real crux of the matter is to make sure business owners have some reliable, accurate system of tracking their business vs. personal transactions….ONE way to acomplish this is a separate bank account…but it’s not the ONLY solution and shouldn’t be presented as such.

January 14, 2010 at 2:54 pm
(6) biztaxlaw says:

I agree that keeping business and personal records together in one bank account can be done, but it isn’t easy. You are an exceptional bookkeeper to be able to do it. I tried it the first year I was in business and got myself hopelessly confused, even though my business expenses were minimal.

June 28, 2012 at 2:43 am
(7) Mel says:

I have been a business(s) owner (partnership, corp, llc, & sole pro) for more than 20 years in each of those categories and currently in a General Partnership and a Corporation. What I’ve found over the years (even in my own businesses) is that we want to eliminate costs as much as possible… business licenses, fictitious names, business checking accounts, etc… and I can assure you that trying to cut These costs will only cost you more in the long run, if you’re really serious about your business.

So, whether you are a Sole Pro, LLC, Gen Partnership, Corp… get the appropriate business license and anything else that is required for your type of business… And Most Definitely, if you do nothing else, have a Separate business checking account!!

November 15, 2012 at 1:22 pm
(8) Vic says:

I am a bookkeeper and have my own business. My question is: does the IRS ‘require’ a separate business checking account from a personal checking account?

November 17, 2012 at 7:55 am
(9) biztaxlaw says:

There is no IRS regulation that requires a business to have a separate business checking account. But keeping your business and personal expenses separate is important to assure that your business is considered legitimate.

January 9, 2013 at 8:30 pm
(10) Myron says:

I’m just starting out as a Sole and I don’t really have the money to open a business checking account but I guess ill have to. Also if any body owns a boutique ill like to ask a couple questions

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