Q: An entrepreneur friend informed me that each time a client pays her, the money she receives goes directly into her personal bank account. I told her that she would never be able to keep tabs on her business that way and that I maintain separate accounts. Is there a right or wrong method here?
–M. Jackson , Rego Park, New York
A: Absolutely. The right method is to keep separate business and personal accounts. I’m going with the assumption that your friend’s business was set up as a sole proprietorship or partnership since it would be illegal to operate that way under a corporate structure.
With that aside, maintaining separate accounts helps to track business activities (such as purchases, investments, and sales) more efficiently because there will be no confusion as to what cash was derived from the business venture. If the funds are in a personal account and the IRS audits your friend’s business, the auditors can claim that any deposit going into that single account, whether or not business related, represents revenues. Then she’d have to sift through all her records to try and justify every deposit to prove what’s business revenue and what’s personal income.
Unless your friend keeps meticulous records, which few people do, the line between personal and business funds can get blurred. And the IRS doesn’t like blurry lines. Making matters worse, any balance transfers between her personal savings and checking accounts further muddles the situation.
Though it may cost some, I strongly suggest keeping personal and business accounts separated and hiring a good accountant to help keep track of things.