Why Your Business Needs a Separate Checking Account

Why You Need a Business Checking Account
Why You Need a Business Checking Account. Cultura RM/Ian Spanier/Getty Images

I have found differences of opinion from tax professionals in the blogosphere on this subject.

June Walker says you don't need a separate business checking account. In fact, she says it's easier without it.

The Wandering Tax Pro Robert Flach says ​you DO need a business checking account.

So who is right?

Why You DO Need a Separate Business Checking Account

It depends on the legal structure of your business.

If you read carefully, you might have picked up that these experts are speaking about different legal business entities. June Walker is talking about independent professionals who are working as sole proprietors, while the other two are a CPA and attorney who are talking about the owners of limited liability companies and corporations.

If Your Business is a Sole Proprietorship

A sole proprietorship is a business entity that is not separate from the owner. If you are a sole proprietor and you combine business and personal expenses, it can be difficult for the IRS to determine if you really are in business. 

But that doesn't mean that the sole prop doesn't have to keep business and personal expenses separate. If a sole proprietorship chooses to keep business and personal records in one checking account, that is not a huge problem, as long as there is a record of all business expenses which are being claimed as tax deductions for the business, and as long as no personal expenses are mislabeled as business expenses.

A sole proprietor can keep just one checking account as long as he or she makes certain that business and personal expenses are correctly labeled.

If Your Business is an LLC, Partnership, or Corporation

For these business entities, particularly for corporations, there is the added concern about keeping company and personal business totally separate.

These business entities are, by their nature, totally separate entities for financial purposes.

Failure to separate business and personal expenses by combining checking accounts can result in the owner being sued for liabilities of the business and for the owner being responsible for corporate liabilities.

Don't Forget the Issue of the Hobby Business

In the case of a business which loses money in the start-up phase, and which could be considered a hobby (like a craft business or horse business), the separation of personal and business checking can help increase the credibility of this effort as a business, not just a hobby. Read this IRS Article "Business or Hobby?" for more information.

In conclusion

If your business is a sole proprietorship, you can probably continue to keep just one checking account if you wish, but just make sure that business and personal expenses and income are labeled and that no personal expenses are claimed as business expenses.

For all other types of business entities, get a separate business checking account.

Disclaimer: I am not a CPA, attorney, or enrolled tax preparer. My purpose is to provide you with general information and suggestions, but your situation may vary from the ones presented here. Before you make any tax or accounting decisions, talk with your CPA or tax preparer.

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