Many sole proprietors just keep it all together in order to create less confusion, and fewer items to manage. However, this might not be in your best interest. Even as a sole proprietor, it can make sense to re-evaluate your banking situation and consider opening a business account.
Track Your Business Expenses
The main advantage of a business account is that it can help you easily track your business expenses, and make them more identifiable. When you use a business account, you clearly define which expenses are business-related, and it can make your record-keeping a little easier.
A separate business account can be especially helpful when you file your taxes. If you are audited, the records from your business account can help you better document your case. Your business account can also help you quickly identify expenses that you list on your Schedule C as a sole proprietor.
And, for your own records, a separate business account can help you see exactly where your revenue is coming from. When you mix personal and business money, it can be difficult to identify personal sources of income and business sources of revenue.
Even as a sole proprietor, you can open a business account. You will probably need to get an Employer Identification Number (EIN) from the IRS to do so, though. Find out from the bank what they require for you to open a business account. You might also need to register with your state as a business before you can open an account. However, even with an EIN and a business license from your state, you can still consider yourself a sole proprietorship.
Consider a Different Business Organization
You don’t have to stick with the sole proprietorship, though. Even though it’s the easiest way to deal with taxes as a business, that’s not always a good reason to continue using it. Sometimes it makes sense to organize as a LLC, S-Corp., or C-Corp.
These business arrangement have the advantage of separating your business assets from your personal assets. If you run into trouble, and your business is compromised, having a separate business entity makes it harder for someone to go after your personal assets; they are often restricted to your business assets. The reverse is also true. If someone comes after you personally, having a separate business organization can help you protect your business assets.
In these cases, you really do need a separate bank account. You’ll need all of your business revenues to go through the business account, and then you can pay yourself, or distribute the profits, to your personal account.
Whether you are sole proprietor, or whether you are organized differently, a separate business account can be a good idea. It can provide you with better record-keeping, and it can help you differentiate between business assets and personal assets when the distinction is needed.