A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from its owner.  The owner undertakes the risks of the business for all assets owned, whether or not used in the business. He includes the income and expenses of the business on his personal tax return.
Does a sole proprietor need to open a separate bank account for his business? There are multiple reasons to do so:
Record keeping

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.

IRS specifically advises that sole proprietor should:
IRS Publication 583 states: “One of the first things you should do when you start a business is open a business checking account. You should keep your business account separate from your personal checking account.”

Maintaining a separate checking account is an excellent way to give your business more credibility in the eyes of the IRS.

 

Personal Protection

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

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