Small Business Taxes & Management^TM--Copyright 2021, A/N Group, Inc.

Personal Accounts

How many bank accounts do you need? Generally as few as possible to get the job done. Bank accounts that aren't used regularly and aren't checked regularly can be a target for scams. That's especially important for elderly individuals. A household employee, or even a relative or visitor can get a hold of a check book and withdraw funds. (For business accounts, a dormant account is an invitation to an unsrupulous employee.) On the other hand keeping large sums in a checking account can be risky. Taking some of the funds and transferring them to a savings or other type of account where the account number is not available to outsiders can reduce the possibility of a big loss. Things get more complicated if you have rental properties, a business, etc. Here are some thoughts.

Even if you have a joint account, you and your spouse should have your own sources of funds (not necessarily a checking account) in case the joint account can't be used for some reason. There are several situations where this could happen.

What about additional names on the account? There are a number of possibilities. First, if you just want the account to transfer to a heir, say your daughter, you can get the bank to make the account transfer on death (TOD) or payable on death (POD). Your daughter has no ownership interest in the account and can't write checks or make deposits, but in the event of your death, the account becomes hers automatically and outside of probate. (It's still part of your estate for estate tax purposes.)

In some cases you might want another party, say your daughter, to have the power to sign checks. That can make life easier if you work at, or travel to, remote locations. Elderly individuals may use it to allow a relative to pay bills. You should be able to accomplish the same thing with a power-of-attorney (POA). The authorized signer has no ownership interest in the account.

A co-owner on an account is just that. If you make your daughter a co-owner she can withdraw money or write checks for her purposes. That account is her asset as much as yours and can be attached for her outstanding debts. It doesn't matter who contributed the funds to the account. For a number of reasons this generally doesn't make sense except for spouses and similar close relationships.

If you have rental properties you should probably have a separate checking account for the properties. Whether or not you need it can depend on the complexity of your rental activity. If you rent out a condo unit on an annual lease your expenses are likely to be minimal--mortgage, taxes, condo fees, minor repairs and possibly utilities. Not a very complex activity. If you rent out more than one house you're probably incurring repairs and capital expenditures regularly in addition the expenses a condo owner would encounter and a dedicated account would make sense. If a property is owned in an LLC or other entity, a separate account is essential.

Business Accounts

Let's start with a mistake many small business owners make. They file a Schedule C for their plumbing operation, consulting business, etc. but don't have a separate bank account for the business. That's a no-no. You should consider a separate account essential. It will make accounting for revenue and expenses much easier and you'll have an easier time to trace your cash. Failure to have one will raise eyebrows with the IRS.

The discussion above applies to a sole proprietorship. Things are a little looser since the business is not considered separate from you personally. But if you do business as an LLC, partnership, S corporation, or C corporation, a separate bank account is essential for liability reasons. You don't want to risk losing the protection of the entity because you don't have a separate account. If you have more than one entity, for example, you own 100 percent of two S corporations and an LLC, each entity has to have a separate bank account.

If you have more than a couple of employees you should have a separate payroll account. A separate account will make accounting for the payroll and the associated employment taxes much easier. And for most service business payroll accounts for a substantial portion, often over 50 percent of total expenses. Keeping a separate payroll account not only makes accounting and cash management easier it also isolates payroll activities to reduce access to sensitive data.

If you accumulate large amounts in an account, perhaps because of the seasonality of your business, you should consider putting the excess in a separate account where the number is only known internally.

You should limit the number of authorized signers on checking account, but you should have an additional authorized signer no matter how small the business. There should be someone who's capable of paying bills in the case you're incapacitated. It can be a trusted employee or relative. Three points. You should notify the bank immediately if they're no longer allowed to sign. You should check with your insurance company on bonding the employee. Finally, you may want to limit the size of the check they can sign.

Keep in mind that if you're ever audited and the IRS suspects you have unreported income, they'll do a bank deposits analysis. Basically, any funds going into a bank account will be considered income unless you can show otherwise. That can lead to the same funds being counted as income two or more times. For example, your business deposits $1,000 of receipts into Bank A. You need the money for payroll so you transfer $1,000 into Bank B, the payroll account. The IRS will count the $1,000 going into A as income and the $1,000 going from A to B as income. If you keep paper or electronic copies of the bank statements it won't be a problem showing the IRS the deposit into B was simply a transfer. This doesn't mean you shouldn't have an account that makes it easier and safer to run your business, but you shouldn't make unnecessary transfers. Make sure the transfers are recorded in your accounting software.

Finally, virtually every business has their own issues. Even individuals can have unusual circumstances. Discuss the situation with your accountant or finanical advisor.

--Last Update 05/28/21