Small business checking accounts let business owners (you) manage their taxes, legality and money issues in a practical manner. As an aside, customers, suppliers and clients can write checks to the business itself, adding more professionalism to the small business.
Here are several differences between business checking accounts and personal accounts – as well as why it is worth your time and effort to keep business expenses from being attached to your personal banking accounts.
1. Legal Protection
Using a personal account for business finances is a huge no-no, as it increases the chances of affecting your legal liability. Whether you set up an LLC or corporation, you are given liability protection. This is because the courts look at corporations as a separate entity – from the people who own that corporation. In the event that a party sues the corporation, the court will “go after” the individual(s) owning the company, as if you and the corporation are one and the same.
Using a business account creates far less issues with IRS audits. For small businesses with assets worth $10 million or less, business accounts used during business operation receive more benefits than a personal checking account. (Which causes more confusion, and requires more paperwork.) This is because expense reporting is a daunting task that is unfortunately mandatory (if not vital) for small businesses. The auditing process itself is full of headaches, when credit card statements aren’t in order.
3. Tax Reports
Again, it does not matter whether you set up a Partnership, Corporation or LLC. A business account separate from a personal account is grounds for avoiding hassles. (Such as keeping your balance in order.) It goes without saying that a large number of hassles revolve around filing income tax reports come tax time – as well as reducing the number of banking fees that may blindside you.
4. Merchant Accounts
There are two types of merchant accounts. The first of two is called traditional merchant accounts, which authorize credit card payment using swipe terminals, and is installed at the physical location of the your business. The other type of merchant account is called online merchant accounts. This means that these accounts authorize and process credit card transactions over the internet – securely.
Clearly, linking up a merchant account with your personal checking account spells a recipe for disaster, and requires the finesse of a professional accountant of the highest calibre to keep transactions in order. Having a merchant account, as opposed to using your personal account, also allows customers to pay the business. Remember: we live in the “age of plastic”, and almost every client and customer you have has one or more bank cards and accounts. (Rare is it to see someone paying with cash these days.)
Now that you’ve determined that, in order to remain relevant as a small business in today’s world (and to avoid legal troubles), it’s advisable that you set up a business bank account, credit card and merchant account service. Now what you have to do next is to set up accounting for the business. AS we mentioned earlier, corporation, sole proprietorship (LLC) or partnerships all have differing benefits and disadvantages, as well as accounting that will suit your business’ suitable needs.
It cannot be overstated that, in the event of a lawsuit, your personal assets may be at risk if your accounts “mingle.” Business expenses will also be paid out of the business account, which will put your personal assets at risk if you do not have a business account.