s a small business owner, you will face a lot of obstacles on your path to success. However, you can make some moves early on to eliminate some of these obstacles. One effective step is to keep your business and personal banking separate. Doing so will improve how you manage your finances, simplify your tax filing, and make it easier to deduct business expenses. Continue reading to get the full scoop on why opening a business bank account can bolster your life as an entrepreneur or freelancer.
7 Reasons to Keep Your Business and Personal Banking Separate
1. Having Personal Banking Separate Helps Business Management
If your business and personal banking finances are in the same account, things can get messy. It can be hard to distinguish what expenses are business investments, and which ones are personal. This issue is especially common for entrepreneurs who process a lot of transactions, such as freelance writers, food truck chefs, and pop-up crochet store owners. A business bank account helps to remedy this issue, offering you receipts and monthly statements. Having this information in one place provides you with a clearer image of your business expenses, revenue, and earnings. And knowing what your profit is allows you to make better business decisions, such as whether to upgrade your equipment or hire a new employee.
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2. More Transaction Options for You and Customers
Keeping your business and personal banking separate helps you in other ways as well. They're called "business bank accounts" because they come equipped with services that your average personal checking account may not have. For example, a personal account may not have the capacity to accept credit card payments, while business accounts can. You will also be able to accept checks digitally with some business accounts, giving you more flexibility as a small business owner. After all, giving their customers more payment options makes life more convenient for them, improving your rapport with them.
3. Different Tools for Different Accounts
A personal banking account or credit card may offer you vacation promotions or include budgeting software to suit your day-to-day home needs. These tools are useful ways to improve what you do with your cash in your own time. Nevertheless, they may not be well-suited for your business needs. A business checking account may have built-in integrations that help level up your business.
Our platform for small business owners links up to accounting software Xero if you have a Xero account. This tool helps you budget for business specifically as it is more sophisticated than personal accounting software. Plus, it’s easy to link your personal bank account to your business one in case you need to send funds across the two. But keeping them separated ensures that you're using the right tools for personal banking, and the right ones for business.
4. Tax Season Will Be Less Stressful
Determining how much you will pay for taxes is no picnic when you own a business. You have to go through every transaction and receipt to determine what your tax obligation is. This process is a hassle if every piece of information is in the same account. It becomes more complicated when your income is displayed in multiple locations. With a business bank account, all your business earnings and transactions are in one place. Every transaction will be related to your biz, meaning your revenue from your various accounts will show up in one place (Xero has this feature). Plus, this type of account will neatly separate your financial decisions into monthly transactions that you can use to file your taxes in a simpler and faster manner.
5. Figuring Out Business Deductions Is Easier
In most small business ventures, you will have to spend money on necessary work equipment and technologies. An organic coffee shop owner will need equipment to brew for your customers. Similarly, a heavy metal band will need to spend on instruments and amplifiers. Even a freelancer may spend on a laptop, design software, or a train ticket for a conference. These all count as business expenses you can deduct when you file your taxes. In fact, there are nearly 100 different types of small business expenses you can deduct, depending on what your organization does. Tallying these costs and separating them by category is easier when you put them all in your business account. Naturally, you should also only use your personal account to pay for non-business needs.
6. Appear More Legitimate and Professional
In any line of business, you want customers to see you as a professional, and you want them to know you're legitimate. It doesn't matter if it's a one-person operation, a large corporation, or anything in between--you want to be taken seriously. Chances are you started a business to add a product or service of value to the world. However, you won't be able to deliver on it if it's not immediately apparent that you're legitimate. Registering your business name makes it official. And having its finances separate from your personal ones solidifies that it's a real business. Once a customer notices these elements, they're more likely to buy from you. We previously mentioned that a business account provides you with more transaction options. And having this variety also plays a role in legitimizing your business. You will seem more legitimate and professional with a business credit or debit card as well.
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7. Limit Your Chances of Getting Audited
We cannot emphasize enough how important it is to have your business finances organized for your taxes. In addition to preparing to file for taxes in a more organized manner, it's vital to avoid getting audited; the IRS can greatly complicate your life with an audit. Avoid the headache altogether, and keep your business and personal accounts separate. Once you do, your business is more likely to run smoothly.
Keeping your business and personal banking separate is vital when you're an entrepreneur. Managing your finances can get tricky if you don't, while filing your taxes will be less time-consuming if you do. Plus, having a business bank account will legitimize your business further, while also making you appear more professional.