Saturday, August 8, 2009

You Do Not Need A Business Checking Account



Hi June,

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.

Venus

Hi Venus,

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.


Best,
June

18 comments:

Visionary Accounting For Entrepreneurs said...

June,

I love your book. I love your passion. However I politely disagree with your advice to have one bank account. Business owners need clarity with regard to the distinction between business and personal. Commingling funds should be avoided if at all possible. Maintaining a separate bank account for business activities enables this to occur for most all transactions. Loans between the owner and the business can be tracked in an Owner's Draw account, to be reconciled at year-end. Kepp up the awesome job! You rock !

Jess said...

Eesh. What happens if a business is sued? From everything I have heard, the comingling of personal & business accounts legitimizes the pursuit of personal assets in judgments against the business, in the court's mind.

June Walker said...

Hello Jess,

Anybody can sue anybody about anything -- pretty much.

You are talking about liability protection. How you structure your business and what insurance you purchase depends on what, if anything, you need to protect yourself from.

Corporations and LLCs provide a veil of protection. Note I said "veil" not "wall." A sole proprietorship typically protects itself via insurance.

To maintain the limited protection of incorporation or operating as an LLC you must keep personal and business records separatly but because you are a one-person business you must be able to identify and document all personal money coming in.

-- June

June Walker said...

Hi Visionary,

I'll post a comment.

Best,
June

Anonymous said...

There is an article in this month's Forbes Magazine (http://www.forbes.com/forbes/2009/1116/investing-internet-security-hacker-is-your-online-bank-account-safe.html) that points out one danger of using one account for both business and personal activities.

"Like many small business owners, Marsha and Michael Shames-Yeakel didn't see any need to build a wall between their personal and business accounts when they started banking online three years ago. Their commingling came back to haunt them a year later after computer hackers transferred nearly $27,000 to unknown points beyond the reach of the law.

Fall victim to a card scam and you're on the hook for a maximum of $50. Have an online banking thief rip off your business and you could be out some big bucks."

-A Missouri CPA

June Walker said...

Hello Missouri CPA,

Thanks for you comment. I welcome more discussion on this topic.

A business checking account is just as vulnerable to online hacking as is a personal checking account.

It is the structure -- LLC, corporation -- and type and amount of insurance that protects a business not two accounts.

-- June Walker

Anonymous said...

Could this apply to an S Corpration?

June Walker said...

A corporation cannot mix personal and business in one checking account.

A corporation must keep all money separate using a separate checking account.

-- June

Triton said...

Hi June:

I am a small LLC business owner who has used my personal money to finance the startup of my business.
I want to know how to document the transfer of funds from my personal savings account to my business account. Could you please let me know how to do this?
Thank You
Deborah

Daniel S. Jacoby said...

One concern of mine, is that more and more banks will not allow you to have a personal account with a business name. I know BofA wont!

June Walker said...

Dear Deborah,

Note the withdrawal as a transfer to account #xxxx and note the deposit as a transfer from account #zzzz.

-- June

Adaline Birmingham said...

Hi, June. Thanks for your great advice! I'm a freelance writer, and my bank told me to set up a business checking account if I wanted to contribute to a SEP retirement account. Is this necessary, or can I just contribute to my SEP from a personal checking account? Thanks!

Adaline Birmingham said...

Hi, June. Do you need to set up a business account if you want to contribute to a SEP retirement plan? Thanks! (oh, photo is of my daughter, not me!)

June Walker said...

Daniel mentions that you cannot have a business name on a personal checking account.

As I explain in Self-employed Tax Solutions
and also in The Confident Indie: Five Easy Steps, you may try your local bank -- local banks are often more accommodating -- or if you don't need business expenses paid from a business account but simply need an account to accept check income then open a savings account in the name of your business.

-- June

June Walker said...

Dear Adaline,

You do not need a business checking account in order to set up a SEP.

My experience has been that banks do not understand sole proprietorship businesses. Doesn't matter whether it regards a loan or a pension account.

So, use a bank when you must for the things a bank is good at -- checking accounts. And use a broker at an investment house to set up a pension and manage your investments.

Cute daughter. Congratulations!

-- June

Anonymous said...

Hi June,

Great advice. I have a question: can I still use the personal checking account/ biz savings account combo if I have an employee? Thanks!

Regards,
Jordan

June Walker said...

Dear Jordan,

Yes you may use your personal checking account even tho' you have an employee.

-- June

Anonymous said...

I am a sole propritor with 1 checking account. Business checking I use for both Business and personal, no issues till NYS unemployment accused me of having my kids as employees. I give them money, christmas, birthdays, school, I did not ask the kids for reciets, how do I prove they did not nor never have worked for me. I have been in business 5 years and have a payroll service and do certified payroll. All that is related to business is run thru my payroll service and paid weekly in a lump sum to my payroll service who sends out all checks.