Reasons for separating business funds from personal money in a large corporation seems clear.
All the money coming in or going out relates directly to business activities. Similarly, incentives for separation are the same for small businesses or sole proprietors, even if the amount of income and expenses is less.
Avoiding the commingling of business and personal funds ensures accurate recordkeeping, simpler tracking of the business’s long-term financial goals and the ability to evaluate the current cash flow position.
Reason No. 1 – Accounting & Taxes
The Internal Revenue Service (IRS) doesn’t require any specific type of recordkeeping.
However, documenting income and expenses in a specified business account is more efficient and less time consuming when preparing financial statements or tax returns. Business transactions that may be tax-deductible are easier to identify when separated into a business account.
With commingled funds, the IRS may deny deductions based on an assumption that the business is a “hobby” due to the lack of separation. In addition, having a stash of secure funds allows you to be ready for tax payments.
Note: Stearns Bank does not offer tax advice. Please seek advice from a tax professional.
Reason No. 2 – Build Business Credit
Business credit differs from personal credit because it is based on the assets and liabilities in the business’s name.
A business credit report may be used by lenders, creditors, suppliers, insurance companies and other organizations to evaluate a credit or insurance application or business deal. Growing the business’s savings – in the business name – will help to build a better business credit rating and may lead to better rates when borrowing.
Reason No. 3 – Established Saving Goals
As a business grows, the benefits of separate business accounts become even more compelling.
Another approach for personal and business funds is to direct everyday business expenses into checking and use savings for long-term goals.
Save for major purchases – whether a down payment toward updated equipment or a remodel of office space. Having these funds in reserve allows the business to replace broken equipment or cover expenses without creating a shortfall. The interest earned builds up savings faster as well.
Reason No. 4 – Planned Giving
Having extra cash in a business savings account allows the business to support the local baseball team or give to a local charity without compromising the budget.
Plan for holiday bonuses or giving back to the community. Save for upcoming events or situations that align with the values of the company.
Reason No. 5 – Strong Cash Position
Business savings accounts are liquid assets that can be accessed whenever needed.
Be prepared for unexpected events such as the pandemic that forced many businesses to close and pay employees out of pocket.
Seasonal businesses are also subject to unpredictable cash flow. A designated savings account offers the safety net that allows businesses to keep moving when surprises or fluctuations occur.
A Strong Safety Net
Having a stash of funds in a savings account allows the business to cover surprise expenses and react to opportunities. This flexibility can be critical as the economy rebounds following the pandemic.
With segregated business accounts, you’re not dipping into personal savings to cover costs incurred by the business. Those secure funds also allow the business to plan – for future equipment, charitable donations or tax and insurance payments.
Some deposit accounts, like Stearns Bank BusinessSmart Checking and BusinessSmart Market Savings, have no minimum balance and no monthly maintenance fees. There are advantages to opening an account, with virtually no downside. Schedule automatic transfer of funds from business checking to savings each month or quarter for easy saving. Or, access accounts online to transfer money as your balances grow.
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