If you’re running a small business, you have a few important choices to make. One of those choices is whether to open a separate bank account for your company or whether you should just deposit the money you make into your own personal account.
For most people, opening a separate account almost always makes sense. Here’s why that’s the case, along with some tips on deciding what’s right for you.
A separate bank account may be important for certain business structures
In some cases, it’s crucial to have a separate company account because of the way your business is structured.
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For example, if you form a partnership with others, company money needs to go into an account owned by the partnership. It wouldn’t make sense to have profits and losses coming out of an individual person’s bank account.
Even if you’re running a business by yourself, you’ll need a separate account if you structure the company as anything except a sole proprietorship. For example, limited liability companies (LLCs) and S-corporations both provide protection from liability, and an S-corp gives you more flexibility with your taxes. But maintaining “corporate formalities” is crucial to get the benefits these structures provide.
Maintaining corporate formalities means you actually treat your business like a separate legal entity. And that means it needs its own bank account.
Keeping your accounts separate can help simplify your taxes
No matter how you’re running your business, you’ll want to have a separate bank account to make filing taxes simpler. You can often deduct certain business expenses — and it can be easier to track and see what those expenses are if they’re coming out of a dedicated company account.
It’s easier to track potential profits with separate accounts
If you’re mixing your business and personal funds, it can become complicated to figure out how much your company is spending and how much it’s making. You don’t want that to happen because then you won’t know if you’re successful or how profitable your business actually is.
If you have a separate account you run your transactions through, it’s pretty easy to see how much your business is spending, how much it’s bringing in, and what profits you have left over.
There are limits on what separate accounts will do for you
While having separate accounts is a good idea, there are limits on exactly what this can accomplish. Say, for example, you’re operating a company on your own and you take on a bunch of debts for the business which you end up not being able to pay.
Even if you have a separate bank account for the company, creditors can still come after you and the money in your personal account. This is always true unless you set up a business structure that makes you completely separate from your company, you don’t cosign for the debt, and you maintain financial separation from the business.
So, be aware that while a separate account almost always makes sense, you may have to take additional steps to keep your personal assets safe. Talking to an accountant or a business lawyer can be helpful if you want to make sure your personal assets aren’t at risk as a result of your company’s activities.
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