Editor’s note: We’re excited to welcome Janet LeBlanc (an accountant and the founder of Paper + Spark) to the Dear Handmade Life blog. You can check out Janet’s first post, Income and Sales Tax Guide for Makers here. Janet has some great tips and a FREE downloadable one page banking cheat sheet. -Nicole S.
One of the first things you may consider doing when you open up shop is setting up a bank account for your business. This is often a “must do” item cited on the generic business set-up checklist, but you might find yourself asking if it’s really necessary. So, today I will share with you why it’s a smart move to separate your business from your personal funds, some tips for how to actually go about doing it, and a one-page cheat sheet to help you in the process.
It’s essential for good bookkeeping
Having a separate bank account will make things tons easier for record-keeping purposes. Keeping all your business transactions in one place (and separate from your personal transactions) means you don’t need to sort through your bank statement every month when you (ideally) are updating your books. You already know everything in your business bank account was for the business.
That means you’re less likely to miss recording a transaction or misclassifying a transaction. You’re also saving your valuable time and energy since you don’t have to sort through each transaction and classify it as “personal” or “business”.
It makes a better paper trail for taxes.
Keeping your business separate from your personal funds basically keeps your money from being “commingled” for tax purposes. Commingled is a fancy way of saying “mixed up all together”.
If you’re ever (heaven forbid) audited, and you have all your business and personal funds in the same account, then the tax man gets to go through each and every transaction and ask you – business or personal? You are then in the fun position of convincing the IRS that you did indeed buy business supplies during that Target run. Structuring your business in a businesslike manner, like giving it its own bank account, makes this process a lot easier on you.
It comes with some nice benefits.
There are perks of having your own business bank account. One being that you can accept checks made out to your business, rather than your own name. If you sell at in-person events or via consignment, you may receive checks made out to your business name from time to time. Nothing is more frustrating than getting PAID but not being able to cash a check since it’s not made out to your legal name!
Having a separate business account also allows you to have a debit and/or credit card for your business. This is great for going on supply or post office runs when you want to pay an expense directly out of your business funds.
It lets you see your biz financial health at a glance.
If you run your business from your personal bank account, you can’t really easily see how your business is doing financially. You might be operating at a loss and accidentally pay business expenses from your personal funds. With a separate business account, you can get an idea of how you’re doing just by checking out your bank account balance.
Finding the right bank for your business
Hopefully I’ve sold you on the idea that a bank account for your business is essential, but you might still be scratching your head about how to find the right bank. I know it can sometimes seem intimidating, but I do recommend opening a business bank account for your business (rather than a separate personal checking account). This complies with bank regulations and allows you to accept checks made out to your business.
Opening a new bank account can require some research on your part. Some banks require minimum balances, fees to open the account, and/or transaction limits. The good news is that proper research and planning can eliminate many of the unnecessary costs.
To help you with this process, I’ve got a handy one-page bank cheat sheet. It includes a few “must know” terms in the bank industry so you can understand what different banks offer as you compare options. It also includes the top 10 questions you should ask before choosing a bank for your biz. This questionnaire guides you through ALL the issues you should consider so you don’t end up any unexpected expenses or issues later on.
ABOUT THE AUTHOR:
Janet is the founder of Paper + Spark, where she offers educational content, tools & spreadsheet templates to help makers and creative become more confident about the financial side of running their business. She’s a maker, Etsy shop owner, and an accountant. Her passion is to help other creative women bring their entrepreneurial dreams to life by going from confused to capable when it comes to their money. Visit her at paperandspark.com.