Keeping separate your business and personal finances

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 Q. If I make money online through royalties from ebook sales, affiliate marketing or selling products on Amazon, do I need to open a separate bank account to receive payments and if so, should I open another checking account or a business account? If its business, should it LLC or sole proprietorship ?

A. Congratulations on your business endeavor. And most importantly, kudos for asking two of the most important questions a business owner can ask.

You’re going to want to keep your business transactions separate from your personal ones.

When it comes to bank accounts, the most important consideration is that you have a business account from which you conduct all your business, said Clare Wherley, a certified financial planner and certified public accountant with Lassus Wherley in New Providence.

“Whether it can receive payments from online activity or not is more a function of cost and capability offered by various financial institutions,” she said. “For all practical purposes you should only need one bank account.”

The IRS wants to see your business operating separate from your personal finances, and a separate accounts will help you establish the line.

“If your business or personal returns are audited and the auditor sees an account with mixed transactions, the audit scope will be greatly expanded,” Wherley said.

She said one of the key indicators the IRS looks for is whether the owner understands his or her financial and tax obligations. Mixing personal and business transactions in a single account signals either a lack of knowledge or disregard for the need to separate personal versus business transactions, Wherley said. Furthermore, if there is one personal transaction an auditor finds that was mistakenly deducted from business revenues, the auditor will begin looking for fraud.

Wherley said your bank account will be the primary source of recordkeeping for identifying the source of your receipts and for keeping track of your deductible expenses. Other records may track additional information needed to complete your financial picture — such as loans or credit, depreciation of equipment or other purchases, receipts due on sales made or payables due for costs you incurred. All of these corollary records will still at one point or another result in a transaction that flows through the bank account.

The same logic holds true for credit cards, she said.

“There should be a card in the name of the business and it should only be used for business transactions,” she said. “If you cannot get a card in the name of the business, use a card in your name but only for business. And the payments on the card should be made from the business checking account.”

If, somehow, a personal transaction gets recorded on a business account, you should reimburse the business with a documented explanation, Wherley said. If, alternatively, you have a situation where you must use personal dollars for a business expense, submit a voucher to be reimbursed by the business.

And finally, your second question: should you be a sole proprietor or an LLC?

Wherley said this question almost solely related to liability.

“As a sole proprietor your personal assets are exposed in a case where you are sued for a business issue,” she said. “An LLC is a business entity created for the purpose of doing business and if you do business only out of the LLC, then normally only the assets of the LLC are exposed.”

You should consult with an attorney to clarify the liability issue as well as other factors related to your business structure.

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This story was first posted in June 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.