Bookkeeper's Blog

A few of my recent posts about the list of items needed when one starts up a business dealt with decisions that a business owner had to make, what type of business entity they should have, should they obtain a federal ID number etc.  This topic there is really no decision to be made.  If you start up a business you open up a checking account in that business name.  Never operate a business’s finances out of your personal check book.  Having said that, it’s perfectly fine, and common, for a new business to have expenses that need to be paid prior to having a company set up as an LLC, or have a federal ID number.  The day you obtain your federal ID number, is the day you should open up your business checking and only pay business expenses out of that checkbook from that point on.

If expenses are paid out prior to the company being set up, a business owner just merely needs to track those expenses, and enter in a journal entry to accurately record what those expenses were for.  You may then cut yourself a check for the total of those expenses, enter the amount in as an owner’s investment, or treat it as a loan outstanding.  The main thing is to properly segregate business expenses from personal expenses.

The Company Checking Account

Now that you have made the previous decisions as to what type of entity you want, if you are going to form an LLC or not, and you have received your federal ID number if required, you can open up a business checking account.

A checking account strictly used for business transactions is highly recommended. – Avoid using cash to pay for any expenses and deposit all cash you receive into your business checking account – itemizing all deposits as to who or what they are from.

This new checking account is solely used for your new business’s financial activity.  You will record all income and expenses for the business.  You do not want to co-mingle personal funds in this account.

Personal funds going into a business checking account are called Owners Investment or Owners Contributions.  Funds going out of the business back to you are called Owners Draws*.  Your business’s financial statements must keep track of these transactions.  If you have personal bills being paid out of a business checking, you are opening up yourself to many potential errors and it can become a nightmare not if but when you are audited to provide explanations as to what every check was written for (many years later).

Any bank is fine; you may start with where you currently bank if this location is best for you or have established a banking relationship already.

US Bank – a good option for a new business checking, no monthly maintenance fees if you keep within certain limits (75 checks per month etc).  Watch the potential for fees however.

Normal check register as you have with your current personal checking account is fine; there are some advantages to having the 7-ring binder checking account.  Separate deposit book with duplicate copies is recommended.

If you find that you are paying for a lot of expenses using cash (a check card is preferred over paying cash) you may think about having a petty cash fund for these expenses.  Paying for cash does not exclude the need for obtaining a receipt.  A petty cash fund is like having another bank checking account that is reconciled on a monthly basis.

Your checkbook register (stubs) along with your deposit book will be used at a later date either by yourself or someone else when “doing the books”.

*I will discuss account names in further detail later.