Kind of fell into a new business. Was hired by client to do some IT development/consulting on a 1099. Want to set up a sole proprietorship - very simple straight forward kind of thing. I have been taking the check from the client and just depositing them into my personal checking account. Do I need to set up a separate business checking account?
It is always best that way. If this is the only job you are going to do and you keep good track of your income and expenses it should not be a problem. If you are going to set up a sole proprietorship in the future and do business you will want to keep things separately.
If you need some advise on setting up your company go to my Website, the Tips and Tricks page for some free advice.
Lori is correct in saying that it is best to set up a separate checking account, because it makes recordkeeping simpler. Use the account only for business transactions and half your recordkeeping is done.
However, it is not mandatory. If there aren't many transactions it won't be hard to keep track of business income and expense on a side record so you know how you stand. The cost of a new account may not be justified for every activity, and you can still have a business without a separate account.
Talk to your tax preparer about what it means to be 'in business', and what you need to document that you are in business.
I hope this helps,
Scott
As a sole proprietor, it is not per se "illegal" to record your business expenses in the same account as your personal finances. I would strongly suggest that you don't though. It makes recordkeeping so much harder later. Additionally, looking down the road the IRS may want to take a look at your "business" and determine whether it is a "hobby" or a business which will determine whether normal business deductions can be taken such as business auto travel, telephone and other expenses. Not having a separate business bank account or set of books will not help your cause here.
Besides, it's actually relatively simple to sit down with your current personal account bank and get setup with a new account and a business debit card. Can usually be done in an hour or less. You can transfer money between each account as well. I don't see a compelling reason not to set up a separate account.
If, given the above answers, you really want to continue using your personal bank account to include the business accounting just use Classes. Go to Lists> Class List. Give your business a Class name. Then go to Preferences>Accounting>Use class tracking>Prompt to assign Class. When you wish to generate a P & L for your business do a P & L by class.
I hope this helps. And welcome to the community of QB users
If you use your personal checking account - how are you going to balance your checking through QuickBooks? Open a free checking and use it. It's a no-brainer If it's linked to your personal checking then you can transfer money in and out via on-line banking and have a "paper trail". There is no reason not to do this.
When you don't want to manage the real bank account in QB: Set up a phony "bank" type of account in your QB file for your business activity. Don't use this for any of the personal transactions at all. Use it to document all money in and out for business purposes. At the end of the year, make a final payment to your self from the bank account and post to Owner Draw. The bank account should end at $0 for the year, with this method.
If you want to manage the real bank account in QB: When mixing business and personal in one bank account, none of the personal expenses or deposits from personal funds should be tracked as anything other than Owner Draw or Owner Contribution. You don't need to use Class because there should never be a personal expense posted into an expense account for business bookkeeping.
Excellent point - there should never be a personal expense posted into an expense account for business bookkeeping. Can't be emphasized enough.
Here's one more point for you.
Scott
I like left brains answer the best. As long as you do the accounting right, you don't have to have a seperate account. Here is another compelling reason to have seperate accounts. If you ever get audited, the IRS now has access to your personal stuff. If it's outside the jurisdiction of the business, they don't. But then every credit card/debit card transaction is recorded anyway. You have to move to cash to be totally private.
But enough solopreneurs use one checking account for both, and the compelling reason it that they are so small and there is so little money, that it would suck up too much cash flow to have two accounts with sufficient balances to never bounce a check.
And also, normally you would use Owner's Draw, but if you want to get fancy, you can use Other Income and Other Expenses for your personal stuff. And then make two P&L reports one for business (with ordinary income and expenses) and one for personal (with Ohter income and expenses).
Good place to add another comment.
While looking at Internal Revenue Manuals about how IRS auditors are to evaluate internal controls of small businesses, I saw mention of what to do when both personal and business expenditures are made out of a single bank account.
The answer of course is that extra scrutiny is required to make sure that personal items don't end up in business expense accounts.
Another good reason to keep them separate. Why make things harder than they need to be.
Scott
I can almost say that I take some exception to what everyone is saying. Of course if the business is large, there are certain advantages to keeping them seperate, but basically the best approach to keeping the records is to just maintain two seperate ledgers for that account.
On your personal checking ledger, record your normal paychecks, ATM withdrawls, gas purchases, etc. On the "business" ledger, record the business deposits, and expenses.
Each ledger should have their own checks with a different number range (Personal starting at 1000, business starting at 5000) In that way your statement should be easier to decipher. The one problem area is if you use a debit card for both purposes. I would recommend agains that and possibly opting for a seperate credit card for business purposes only.
When you balance, each ledger balances seperately, then add the 2 ledger balances, the 2 outstanding items lists, and it should yield your Bank Account Balance.
Not simple, but effective and not hard either
klmcbeth, nearly everyone is contributing something different, so it is surprising to see you take some exception to what "everyone" has contributed.
Your solution will make it nearly impossible to use QB to manage and reconcile the actual physical bank account. The point that you are overlooking is, the banking side isn't the main topic of this discussion. It is the expenditure side of the data tracking that is the point of not commingling funds. That is the risky side of activities when not having a segregated account.
You also recommend a separate set of checks, not using the debit card for both activities, and getting a specifically business credit card.
Basically, you may take exception, but you pretty much just sang to the choir.
I always advise my clients to try and not "co-mingle" funds. Even as a new business, or independent contractor, it's usually best to keep the funds separate. It also shows that you take your business serious. Should your business ever be audited by IRS or your state tax agency, having a separate business bank account shows some credibility.
Hope this helps.
Ktasha N. Hardge, Tax Professional
You are starting with small business so i advice you that your personal bank account is very private things. In that case you have to create a new bank account that has for your business account only. To avoid the any wrong transaction. It was safe yet.
I agree, protection of privacy is a large consideration.
Scott
