October 1, 2004
The Need For Separate Accounts
When Margo Davidson started her sole proprietorship, Davidson & Company Marketing, in 1998, she set up a business account to track revenues and expenses and to present a professional image to both clients and suppliers. But during a few months of slow business activity, Davidson had to close the business account and use her personal one. “It wasn’t really to my advantage,” she says. “I had to do more work to see what money was coming in from the business. I didn’t like telling my new clients to make out the checks to my personal name. It just drove the point home that you really can’t be considered a serious business if you don’t separate your accounts.”
While federal regulations stipulate that corporations and L.L.C.s must keep business activity separate from personal activity, commingling funds can sometimes be irresistible to sole proprietors and home-based businesses. Sonia Stockton, regional director of the Maryland Small Business Development Center at Towson University, says business owners don’t separate accounts for a number of reasons, from not planning for the future to having concerns about the additional money needed to set up the account. If the cost of opening a business account is a deterrent, Stockton advises business owners to conduct a more thorough search for banks that offer free checking accounts to businesses that make a certain number of transactions per month.
Sean Hamilton, senior personal banker at Albina Community Bank in Portland, Oregon, the only minority-owned community development financial institution in the Pacific Northwest, says that having separate accounts is a smart business practice.
Separating personal and business accounts allows you to do the following:
KEEP ACCURATE RECORDS
Trying to figure out business expenses from personal ones can get more tricky over time, especially when cash is the main form of payment you receive. “If you’re not keeping track of every receipt, then things fall through the cracks,” says Hamilton. Federal regulations may not require sole proprietors to have separate accounts, but they do require accurate documentation. Having separate accounts facilitates that.
PAY TAXES EASILY
Keeping separate accounts also makes it easier for your accountant to develop your financials for the future. Even though you might pay taxes at the end of the year, Stockton says, “After a year you have to track everything, so why not put a process in place now.” If the money to finance the business comes from your personal accounts, Stockton recommends either injecting money into the business as equity or lending that money to the business account so you can start paying for your business expenses out of the proper account. In addition, you can create a lease between yourself and your business if it is a home-based business, depending on the square footage the business occupies. When the business writes a check to the owner, there is now a good tracking record for tax purposes, explains Stockton.
MONITOR YOUR PROGRESS
Stockton says having a business account is key to monitoring the health of your business. “One of the things you should be doing is