Whether you run a full-time business or have a small side hustle, you might wonder if you need a separate bank account. It might seem like too much trouble if you’re part of the gig economy, but there are a number of reasons why it’s important to keep your personal and business banking separate. Not only will it make your life simpler, it’ll keep your finances protected.
Small Business vs Hobby
If your intention is to make a profit for the work you perform and/or your livelihood depends on the income, then you likely run a small business. If the income is more a "nice to have" and/or your business expenses consistently outweigh the income you earn, then what you call a business might be a hobby in the eyes of the IRS.
While no one factor determines a business vs a hobby, having a separate bank account for your small business is one of the first things the IRS will look for in an audit. It helps determine the validity of your business - a determination that could heavily impact your wallet come tax time. A true business can claim expenses and losses to offset income taxes. A hobby cannot claim similar losses, but you’ll still owe taxes on the income earned.
Reasons to Open a Separate Business Bank Account
Whether you own a business, freelance on the side, sell items through an Etsy shop, or drive ride-share on the weekends, all income and expenses should be properly accounted for in a separate bank account. As we have already discussed, it is one of the main factors the IRS uses to prove you run a legitimate business. But there are other reasons as well:
Track Expenses and Income
Opening a separate bank account for business expenses and income is the best way to keep clean accounting records. You’ll have access to a debit card that can be used exclusively for business purchases, which makes write offs down the road easier to document. Having a separate bank account also means you can easily connect with your preferred accounting software and export banking data cleanly. Imagine trying to do that with your personal expenses in the mix.
Obtain Business Funding
At some point, your business might be in need of financing to manage cash flow or making a large purchase. But financial institutions and working capital providers won’t offer funding to a
business without a separate bank account. If you can’t show three to six months of business bank statements, you likely won’t get approved for funding. Don’t get caught saying "If only …"
Streamline Your Taxes
Having a separate bank account for your business means you can easily show cash flow history and record profits and losses. This will make tax time simpler. Why wade through months of combined personal and business withdrawals and deposits to make tax calculations? A separate bank account shows the IRS you treat this work seriously. And it’ll go a long way to help validate your business and streamline the process if you get audited.
Make Business Decisions Based on Clear Data
A separate bank account will give you a clear picture of the health of your business. When you have clean data, you can make better decisions about the direction of your business. You can identify areas to cut expenses or calculate how an additional employee could increase profits. Simply put, you don’t know your business if you don’t know the data, and keeping a separate bank account is a crucial piece of staying organized.
It’s Easy to Open a Separate Business Bank Account
Opening a separate bank account for your business doesn’t have to be difficult or expensive. As an Orange County’s Credit Union Member, you have the benefit of keeping all your finances in one place with our Business Banking products, including Business Checking, Business Savings, and Small Business Loans and Lines of Credit. Contact us today to discuss your options and let’s work together to make your business dreams a reality.