Separating business and personal finances is beneficial for Texas startup
and early stage businesses
The classic entrepreneurial venture begins as a hobby or a passion-based project that blossoms into a money maker.
For some, that means creating crafts from locally sourced materials and selling the gifts online. For others, it's offering piano lessons on nights and weekends. Or harnessing decades-old family recipes to produce tasty concoctions sold at farmer's markets.
Regardless of the product or service, a few things can turn a fun side hustle into a headache-inducing number-crunching grind quicker than sifting through a personal banking account and tagging business debits and credits.
"It may seem easier in the short term to operate out of a personal account, but think about it as time passes," said Marty Malone, senior product manager with BOK Financial.® "In a few months, it will be hard to remember what was a business expense and what was personal. That also makes it harder to keep an eye on overall revenues and expenses or identify a cash flow problem."
Alternatively, maintaining a separate banking account for the business allows for a clean picture of the ins and outs of the gig, which leaves the owner better prepared for potential financial obstacles and opportunities—especially at tax time.
"Think about what your accountant might ask you to provide," Malone said. "If you can say 'here are my business account statements,' that's so simple compared to saying 'I've highlighted what I think are business-related transactions on this statement, and here are some receipts that I think were for business expenses.'
"It really helps to clean up that process."
In 2021, as the pandemic continued to unsettle the traditional workplace landscape, Americans created a record 5.4 million new businesses, topping the previous high of 4.4 million businesses set in 2020.
Bank of Texas’ Fort Worth region CEO Mark Nurdin and Dallas region CEO Mandy Austin agreed that these markets are a great place to start a business. They are tremendously proud of the entrepreneurial spirit in the community and Bank of Texas is excited to play a part in it. Starting a new business takes tenacity and dedication and there are a few things, like separating finances, that will be tremendously valuable to those starting out.
While 2021's startup flurry may have obscured the importance of establishing separate personal and business banking accounts, the urgency has ramped up in 2022 amid new Internal Revenue Service (IRS) revenue reporting requirements. If a business receives more than $600 in customer sales from a third party—think of sites such as PayPal and Amazon—it will receive a 1099-K, which is also filed with the IRS.
This means even the smallest of enterprises will likely land on the IRS's radar going forward, whereas previously, the threshold for the 1099 form was $20,000.
"Managing a small business' finances needs to be taken a lot more seriously now," Malone said of the heightened visibility of smaller revenue payments.
To aid busy startups in establishing a unique financial presence, BOK Financial and Bank of Texas recently rolled out a platform for business owners to complete the bulk of their new account applications online. Once they've entered the core information, they arrange for an in-person or call-center appointment to verify information, ensuring the business-related details are secure.
"We've found business owners appreciate the convenience as well as the security measures we've built into our new digital process," Malone said.
The initial information required includes details on the legal structure of the business; the tax identification number, which could be a sole proprietor's Social Security number or a company's employer identification number; and personal information on anyone authorized to use the account.
Pros and cons to all options
Businesses have an increased number of choices when it comes to banking and financial services; many offered on a strictly digital basis. Malone acknowledged that some might have enticing offers at the outset, but cautioned that a growth-minded founder should look beyond the near term.
For example, a service provider that can streamline funding for future equipment purchases, offer strategies to ease cash crunches down the road, and facilitate credit and debit card payments can be a valuable partner during a business's inevitable ups and downs.
Plus, there's the matter of resolving any hiccups in the account management.
"Imagine the first time you have a question or a problem, and you need to talk to someone knowledgeable who can assist you," she said. "With a bank, you have someone located in the community who's invested in supporting the growth of your business into the future."