Sole Proprietor bank account trap
How to avoid the Sole Proprietor bank account trap?
You have decided to start or buy and operate your own business. Congratulations! You have also decided that operating as a Sole Proprietor is your best legal option as it does not cost any money to file a legal entity and you can worry more about that once the business gets established. That is a good business decision.
When you first open your business as a Sole Proprietor there is no legal requirement to notify the Internal Revenue Service unless you have employees. In fact, the IRS may not know you exist as a business until you file your tax return. If you have earnings from a business, a specific form is used as part of your tax return called a Schedule C. The only exception to this is if you start to hire employees in which case you are required to register your business and obtain a Federal Employer Identification Number. This is also called an EIN or Employer Identification Number
You start making some sales and you bank the money in your checking account. You also have some costs you have incurred so you write out a check from your personal check account as that is where you deposited the money. Is this legal? Yes – perfectly legal. Is it good business? I do not think so…and here is why.
First, most people do not get around to balancing their personal check book and the deposits they take to the bank. If your salary is automatically credited to your account, most people make sure there is enough in place to pay the bills and then move on with life. It is critical to make sure you know how much money is coming in that belongs to your business and, equally you know how much is going out.
Second, if you own and operate a business it is wise to put all the deposits you receive into a separate bank account as the money you have been paid may not be earned until some future action happens. For example, it could be a deposit to provide a service or product. However, if that service or product cannot be provided the money will need to be refunded. If it is mixed with your personal account and been spent, now you have time and possibly legal costs incurred dealing with this. It is also bad for business as you can guarantee the customer who is owed the money, is going to tell their friends and family about it.
A third reason, and this applies in states that have a sales or use tax, money you receive from a customer will include sales or use taxes. As the business owner that receives and collects the payment from the customer, it is your responsibility to submit the sales or use tax.
Owning and operating a business requires many disciplines. One of the greatest requirements is managing time and spending it wisely doing positive things. There is nothing productive about receiving money from a customer and not being able to refund it, if and when the need arises. Play it smart and keep your personal checking account separate from your business and it will prevent the good will of your business being unnecessarily damaged.
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