Whether you work from home or own a multi-million dollar company, there are numerous reasons to separate personal and business finances. Yet, business owners still make the mistake of using a personal bank account for their business. Show
Although having two bank accounts appears inconvenient, you shouldn't use a personal account for your business finances primarily because it can affect your legal liability. In fact, one of the first steps to owning a business should be opening a business bank account, in addition to a personal bank account. Most banks now offer free business checking accounts so cost shouldn't be an issue. Legal ProtectionWhen you set up an LLC or a corporation, one of the primary advantages of doing so is the legal liability protection it affords you.
But, if you mingle your finances, a court can potentially go after the individual running the company because it looks less like you're running a separate entity and more like you and the corporation are one and the same. Tax AdvantagesIt doesn't matter if your business is run out of a home office, strictly Web-based, or is a "brick and mortar" location, a separate business account has its advantages. Regardless of whether you set up an LLC, Corporation or Partnership, maintaining a business bank account will help you avoid unnecessary hassles. For example, using a separate business account makes it much easier come tax time, as you will need to file your business income and expenses separately from your personal transactions. Differentiating personal expenses from business expenses when they are in the same account can be time consuming and cumbersome. Bryan Greenwood from Washington Mutual Small Business Banking notes, "Keeping separate accounts (business and personal) is always the smart thing to do. Many business owners are so busy starting, running and growing their businesses, it is always better to develop good business habits early, especially when it comes to finances and record keeping." In addition, the IRS has stringent rules for those who work from home about what can be deducted as "business expenses." If you use your personal account, the IRS may frown upon those deductions, even if they are legitimate business expenses. Consider Your CredibilityBesides IRS auditing issues, using a business account also adds a note of professionalism to your company. If a client receives a personal check for services rendered, they may not take you as seriously as you would like. However, a professional check from a business account will convey professionalism and, more importantly, confidence. Added Convenience - the Business Credit CardOne of the best ways to make sure you distinguish between personal and business expenses is by using a separate business credit card. Expense reporting can be a daunting, yet crucial task for small businesses, and credit card statements can be a valuable asset when monitoring business spending. In addition to the obvious reason of deducting business expenses with ease, using a business credit card gives businesses an additional line of credit that may not be an option from a traditional bank. Not only can businesses extend their cash flow to pay for business supplies, vendor services, and other ongoing payments; business credit cards can be used so that monies do not come out of the business's cash accounts. As soon as a customer pays his or her bill, the credit card bill can be paid. Many business credit cards also come with business "perks," such as frequent travel discounts, higher credit limits, longer billing cycles, and lower interest rates. For example, the American Express¨ Business Gold Rewards Card is very popular among entrepreneurs. You can earn up to 40,000 bonus membership rewards points during the first year, enough for one round-trip free domestic ticket. In addition, some business cards give business rewards, such as cash back options on the purchase of office supplies, while others offer flexibility to businesses that may not be offered with a standard, personal credit card. Finally, credit cards have zero liability for fraudulent charges, giving businesses added protection if their credit is used by an unauthorized party. Processing Credit CardsWith the ability to shop on-line and run in and out of a store in the blink of a Visa swipe, business owners are realizing that customers hardly ever carry cash anymore. So what happens when a potential customer comes into your small business with only a MasterCard, but you only take cash? What if a customer searches for companies on-line with your specific product, but doesn't find you because you lack a Web site with on-line shopping? This is where a reputable Merchant Account Service is key. A merchant account is a credit card business service set up by a financial institution, allowing businesses to accept credit cards as payment for goods or services. These companies process funds from respective credit card companies and then transfer the collected funds into the business's checking account. There are two types of merchant accounts: traditional merchant accounts and on-line merchant accounts. Traditional merchant accounts authorize and transmit credit card payments using a credit card machine (swipe terminal), which is installed at the business. Online merchant accounts accept, authorize and process credit card transactions securely over the Internet. Like any type of business partnership, merchant account providers should be researched thoroughly. The best way to find a suitable merchant account is to shop around and compare merchant accounting service companies, as many of them may try to take advantage of unknowing business owners with hidden fees, such as chargeback, pass through, minimum or termination fees. Be sure to read any contractual agreement extensively before signing on the dotted line, as some contracts may carry a non-cancellation clause. Be sure to read any contractual agreement extensively before signing on the dotted line, as some contracts may carry a non-cancellation clause. Setting Up AccountingDetermining whether you will need a business bank account, credit card and merchant account service is imperative, but setting up the accounting for the business is also an important step. You have probably already determined what type of business you will be running, whether it is a corporation, sole proprietorship, or partnership. If not, this must be established, as your business structure will determine which type of accounting will be best suitable for your business' needs. Once the business structure is established, the next step is to clarify the business' spending requirements. How many checks will you be depositing each week? How many checks are written? Does your company need the ability to deposit large amounts of cash? Is in-person banking a priority or will you be making deposits after hours via an automatic telling machine? These are just some of the questions that need to be answered in order to find out which type of bank accounting is right for you. With each of the above, finding a reputable company is imperative, whether it is a bank, credit card company or a merchant account. Select a company that is convenient to both your business and your lifestyle. In addition, be sure to choose the most appropriate type of account for your particular business.
Whether you are just starting your business, or have been operating as a sole proprietorship or general partnership, you may be wondering about the advantages of incorporating your business as an S corporation. Many business owners assume it will be too costly or time-consuming — but neither is the case. What is an S corporation (S corp)?A corporation is taxed for federal income tax purposes in one of two ways – as a “C corporation” or an “S corporation”. An S corporation is a corporation that is treated, for federal tax purposes, as a pass-through entity through an election made with the Internal Revenue Service (IRS). Electing “S corp” status could lead to important tax benefits. A corporation is created by filing Articles of Incorporation with the Secretary of State or a similar government body. There is no requirement to notify your state of incorporation that your corporation will be an S corporation. This is a tax matter handled by the IRS. The difference between a C corporation and an S corporation is in how they are taxed under income tax laws. The state corporation laws make no distinction. An S corporation issues stock and is governed as a corporation, with directors, officers, and shareholders who function in the same manner as their C corporation counterparts. The owners (the shareholders) have the same protection from liability as shareholders of a C corporation. An S corporation shareholder’s personal assets, such as personal bank accounts, cannot be seized to satisfy business liabilities. However, like a sole proprietorship or a partnership, an S corporation passes through most of its income, losses, and deductions to the shareholders. Unlike a C corporation, there is no "double taxation", once at the corporate level and again on the individual shareholder level. Each shareholder is subject to his or her own individual tax rate on the income (or losses) passed through to him or her. Why is it called an S corporation?The S corporation derives its name from Subchapter S of the Internal Revenue Code which provides corporations a "tax election" option — a choice on how they want to be taxed. Under Subchapter S, a company elects to pass all its profits to its shareholders directly. (The C corporation gets its name from Subchapter C of the IRC – which is the part of the tax law that corporations will be taxed under unless they make the S corporation election.) What are the requirements for an S corporation? To qualify for S corporation status, your corporation must meet the following requirements:
To become an S corporation, your corporation must submit Form 2553 Election by a Small Business Corporation signed by all the shareholders. S corporation advantages: tax benefits and moreThe advantages of an S corporation often outweigh any perceived disadvantages. The S corporation structure can be especially beneficial when it comes time to transfer ownership or discontinue the business. These advantages are typically unavailable to sole proprietorships and general partnerships. S corporation advantages include:
An S corporation may have some potential disadvantages, including:
What is the difference between an S corp and a C corp?The difference between an S corporation and a C corporation is in how they are taxed under the Internal Revenue Code. A C corporation is the standard (or default) corporation under IRS rules. It is a separate taxable entity. A C corporation files its own income tax return and pays taxes on its income at the federal corporate income tax rate. All corporations are taxed as C corporations unless the corporation makes an election to be taxed as an S corporation. An S corporation is a corporation that has elected a special tax status with the IRS. An S corporation is not a separate taxable entity. It files an information return but not an income tax return. The corporation’s income, losses, and other tax items pass through to its shareholders, who pay their share of the corporation’s profits on their personal income tax return at the personal income tax rate. To learn more about the two ways a corporation’s income can be taxed read Compare S corporation vs. C corporation. Do you know about LLCs and S corp elections?To take advantage of the structural benefits of an LLC combined with the taxation benefits of an S Corp, you can establish your business entity as an LLC and then make the election to have it be treated as an S corporation by the IRS for income tax purposes. However, regardless of how an LLC is taxed (and it can be taxed in the same manner as an S corporation, C corporation, sole proprietorship, or general partnership), it is still an LLC. Its tax classification has no effect on its entity status – it’s still an LLC. Read more about LLCs electing S corp tax status. How to form an S corporationTo form an S corp, you must first form a corporation by preparing and filing Articles of Incorporation or a Certificate of Incorporation with the proper state authorities. You must also pay filing fees and any applicable initial franchise taxes or other fees. The type and amount of information required in the incorporation documents varies by state. After your Articles of Incorporation are filed, you need to file Form 2553 with the IRS to elect S corporation status for your company. With BizFilings’ Basic and Standard Incorporation Services, we will provide Form 2553 to you for you to finalize and submit to the IRS. Our Complete Incorporation Service includes an S Corporation Obtainment Service, where we interact with the IRS on your behalf to obtain S corporation status for your company. Additionally, your S corporation must hold an organizational meeting (initial meeting of directors) where you adopt bylaws and undertake other initial corporate actions (such as appointing officers and approving a resolution to open a business bank account). You should distribute stock certificates to shareholders and record these transactions in the company’s stock transfer ledger. The actions of the organizational meeting should be documented and kept along with the Articles of Incorporation and bylaws in a corporate record book. For specific questions on which business structure and tax classification are best for your particular situation, it is best to consult an attorney or accountant. Start your S corp todayBizFilings can help you quickly form an S corporation in three easy steps. Get your S corp started today and explore our flexible packages and tools for forming your business with the state, keeping your business compliant, and fulfilling additional state and federal requirements.
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