A basic reason for maintaining a separate checking account for business is that it results in easier record keeping. When personal and business expenses are commingled in a single account, separating out business from personal at tax time can be cumbersome and time-consuming. Separate accounts lead to easier record keeping. They will also make a possible IRS audit much easier to prepare for.
Opening a checking account may result in fees, but these can generally be written off as business expenses at tax time.
Maintaining a separate checking account is an excellent way to give your business more credibility in the eyes of the IRS.
You want to protect your personal assets from corporate debt liability; this separation is known as a “corporate veil.”In case of a lawsuit, you would need to be able to prove that your business is “real” and not just a shell created to avoid financial responsibility. The best way to avoid the piercing of this corporate veil is to incorporate your business, and to create a separate checking account as a step in further legitimizing your business. Having a separate account could also help protect your personal assets in the event of a lawsuit.
Hobby versus Business
Creating a separate checking account helps identify your business as just that, a business, not a hobby, both in the eyes of the IRS and your customers. Why should you care whether the IRS views your endeavor as a hobby instead of a business? One big reason is that losses from a hobby are not tax-deductible, while losses from a business are. A separate checking account clearly defines your venture as a business, not a hobby.
I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.
Please do not hesitate to contact me should you have any question