One checking account does not waive recordkeeping requirements.

In the comments to Indies are not Corporations Monica, who is an attorney, wants to know “how to avoid commingling if the funds are in the same account.”

Your choice is not between commingling or not being able to keep accurate, provable records. If an indie has one checking account and, let’s say, uses Quicken for her recordkeeping then she might do the following:

** A meal with a client would be categorized as M&E for business meals and entertainment. Lunch with her daughter would be categorized as Family Dining.

** Expenses at the printers might be categorized as Photocopies-Printing or Family Wedding Invitations.

** For money in she might categorize the $1,000 as Graphic Design Income:Clyde Client. Whereas the $100 from mom would be categorized as Personal Inflow:Birthday Gift.

If the above transactions were questioned in an audit the indie would need to show the back-up for the business expense and income transactions as well as proof that the $100 was a gift from mom and not a payment from a client.

A Quicken report shows business income and expenses in a format acceptable to the IRS. And because of the ease of one account the records would likely be more accurate than flipping money back and forth from one account to another as funds ebb and flow but not necessarily as needed. Self-employeds do not find it easy to annotate account transfers accurately and so transfers often end up looking like income.

For the same reason, I advise independent professionals to not spilt checks. A $1,000 payment from a client should be deposited as a $1,000 payment. If $200 cash is needed then write yourself a check for $200 cash. It makes the audit-trail less wiggly.

Of course, the above applies to sole proprietorships and those sole proprietorships not operating as an LLC – unless the LLC is for show only.

Note that for a one-person business, even if that one-person business were a corporation, in an audit the IRS would want to see statements from all personal bank accounts as well as the accounts of the corporation. The one-person business would be required to prove the source of all the deposits into the personal accounts.

-- June Walker