When you start your own business, do you have to have a separate bank account?
The short answer: yes.
But let's dive into this a little bit more, plus let's look at why you need to have a separate bank account for your business, instead of using your personal bank account to receive your business money.
Separate Bank Account for Bookkeeping Purposes
When it comes to doing your business bookkeeping, when you have separate bank accounts for both personal and business, it is much easier to do your bookkeeping.
You don't have to sort through all of your personal transactions to only get the business expenses.
You will also make sure that you have all of the business purchases included in your business bookkeeping. It can be very easy to forget what transactions are business and which are personal when you are sifting through your personal bank account that is mixed with both business and personal purchases.
You already don't enjoy doing your bookkeeping for your business, so why make it that much harder on yourself and commingle bank accounts. It will take you ten times as long to get your bookkeeping done than if you had a separate bank account for your business.
Separate Bank Account for Audit Purposes
When you get audited, have fun explaining to the auditor what every single purchase is when you use your personal bank for your business.
Then you will also have to justify why that Target run or Dollar Tree run was really for your business and not a personal purchase.
Don't forget to keep copies of all of the receipts for your business, or you aren't getting credit for anything!
For purposes of an IRS audit, anything that is questionable as to whether it is a business purchase or a personal purchase, you won't get the expense credit for it.
This will then increase your net income, which in turn, will increase your tax due.
Save yourself the hassle and open a separate bank account for your business today. Or have fun being audited!
Also check out: Making Your Business Recordkeeping Easy
Sole Proprietor Separate Bank Accounts
As a sole proprietor, it is legally not required that you have separate bank accounts. Your business is really just an extension of you, when it comes to your taxes.
But for the two reasons that are stated above - bookkeeping and audit purposes, you are going to want to have a separate bank account.
Plus when you change your business legal structure from a sole proprietor in the future to one of the other structures (LLC, S Corporation, C Corporation, etc.), you already have this in place and don't have to rush to get it set up. You already have enough things to do with your business already.
Whenever you purchase a personal expense from your business funds, that money is still taxable. You are not decreasing your taxable income (net income) by spending on personal purchases. I explain this more in my article about paying yourself.
Other Business Legal Structures Separate Bank Accounts
When you have a business legal structure that is anything but a sole proprietor (i.e. LLC, S Corporation, C Corporation, etc.), you are legally required to have a separate bank account for your business from your your personal bank account.
As an LLC, you will actually lose the limited liability protections that are offered to you, if you do not have separate bank accounts.
Your business is a completely separate entity from you when you are set up with one of these legal structures, and you need to have a separate bank account for your business than your personal account.
Finally take your taxes from frustration, chaos and confusion to calm and organized.
Learn everything you need to know to master your business finances and taxes explained in plain English.
Paypal Personal versus Business Account
So what if you have a PayPal account for your business? This PayPal account should be a business account.
The TOS for PayPal will actually shut down your account if you do business transactions with a personal account.
And if you receive money in your PayPal account for the friends and family option, you are also risking getting your PayPal account shut down.
You also risk losing the money that is in your PayPal account when the account gets shut down because of breaking the Terms of Service.
Also check out: How to Create a Cash Flow Plan for your Online Business
Can I still make personal purchases through my business PayPal Account?
Yes and no. Again this is going to depend on your business structure, as described above.
You should actually have separate PayPal accounts for your personal spending and your business spending to keep them separated, no matter how your business is structured.
But as a sole proprietor, you can legally commingle them.
And all purchases that are for personal expenses are then classified as owner's pay, not expenses. You are also responsible for paying taxes on your owner's pay (it does not decrease your net income).
What about Paying Personal Expenses?
If you have separate bank accounts, how do you then pay your personal expenses? That money is just sitting in the ether, earmarked for your business...right?
Well, you will pay yourself from your business, just like you would receive a paycheck from a job, you are receiving a paycheck from your business.
This pay shouldn't be whenever you have money in your business account or need to pay a personal expense. You should pay yourself regularly. Check out this article on paying yourself from your business to learn more about paying yourself properly in your business.
It will be a huge hassle to not have separate bank accounts for your business and personal spending.
Depending on the legal structure of a your business can also answer the question whether or not it is legally required to have a separate bank account.
But you will save a lot of time and energy if you just start with separate bank accounts from the beginning of your business. Or if you are just reading this post today and haven't yet gone to get a separate business bank account, then start today.
Next read: Paying Yourself in Your Own Business