Saturday, August 8, 2009
You Do Not Need A Business Checking Account
Remember me? We had a face-to-face here in Cambridge MA years ago.
I just helped a class of Certified Family Coaches to graduate, and sent them to your site. One of the concerns they have is about whether or not they should set up a business checking account. Their instructor told them, "Absolutely." I disagreed.
Banking fees are ridiculous these days, and I want folks not to contribute, unnecessarily, to the banks' economic stimulation package, if you get my drift.
BTW, your advice and book still continue to serve me well. I swear by all I have learned from you. Even, sometimes, contradicting my tax accountant.
I remember you well. And your two children. Who were so cute and fun and well behaved during our tax meeting.
Here's what I have to say about checking accounts. Please send the graduates to this post and, even more important, send their instructor. I think he/she could use some instructing.
You need only one checking account. Do not open a separate checking account for your business.
Yes, that’s the exact opposite of what Sammy Segar, CPA, told you. And it’s not just Sammy who tells you that. In an IRS publication, you are urged to open a business checking account and “although a bank may charge you an extra fee for a business account, the new account will more than pay for itself in accounting efficiency.” The very next example from the IRS in the publication is the mixed use – personal and business – of your automobile. So, let’s see how efficient two checking accounts would be in this situation – hmm … guess you are expected to pay for each gas purchase with two checks – one for the personal use amount of gas and a business check for the business use portion.
Most accountants disagree strongly with my position – because they don’t know you like I know you. My system will save you money and time; their advice will cost you money and time.
Let's look at Luisa Lifecoach shopping for groceries at Total Foods. If she had both a personal and a business checking account, which one should she have used to pay for her groceries, assuming she knew that three business associates were dropping by that evening? Oh! Says Sammy Segar, CPA, she should have divided the groceries into two piles: one for family and one for business guests. And paid with two checks. And what if Luisa’s three-year-old was tearing at the display case while she was at the checkout and she was late picking up her 10-year-old at soccer practice?
Sammy Segar always insists that a business checking account is a must. But Sammy, if Luisa is just starting out, where does she get the money to put into her business account? Sammy says, transfer it from her personal account. But I thought that you’re supposed to keep these accounts separate. Okay, says Sammy, after she has made a little money, transfer the funds back to her personal account. But whoa, wait a minute, Luisa transferred too much out of the business account; now she’ll have to move some back to the business account again. It’s beginning to get messy already, and how will she keep a record of those transfers? Well, she won’t get any help from Sammy: he hates working with those eccentric freelancers.
As long as your records are accurate one checking account is perfectly acceptable to the IRS. I think one big factor in the insistence on a business checking account is that it’s supposed to cover financial shenanigans. Many people like to believe that because something is paid by a business check that makes it a business deduction. Of course, that is not so! The attaché case for your daughter's twentieth birthday, even though purchased with your business check, is not a business expense. But the flowers, paid from your personal account, given to your mother as thanks for reviewing your business plan, is a business expense.
As I've said before, in the lives of self-employeds the line between personal and business is not clearly drawn; it wiggles around a lot. By the nature of the types of businesses that self-employeds are in and by the structure of a sole proprietorship, personal and business often intertwine -- almost always so in the creative fields. You do not want to struggle with business versus personal decisions every time you spend money.
Use one checking account!
Besides, a business checking account costs money, while your own checking or savings account is usually free of charge. So who needs the extra expense? Well, sometimes it's unavoidable. It may be necessary to have a separate account, for instance, if you do not use your own name as your business name.
If graphic designer Victor Visual called his business, the "Double V Studio" most folks would pay him with checks made out to his business name. If his bank does not allow both names – Victor Visual and Double V – on his account he’ll have to have an account in the name of his business in order to deposit his checks. The simple (and money-saving) alternative is for Victor to open a savings account in his business name, deposit the checks into it, and then have the bank do an automatic sweep of the funds from his savings to his checking account whenever the funds reach a certain amount specified by Victor.