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Do I Need a Business Bank Account?

When you first launch your small business, it’s convenient to use your personal bank account for business expenses. After all, you may be using your personal savings to cover startup expenses until your business gets off the ground.

The trouble is, once you start using your personal checking account or credit card for business expenses, it’s tough to untangle. For that reason, we recommend that all businesses–no matter the size–keep business and personal costs separate by opening up a business bank account.

Personal vs. Business Bank Account: What’s the difference?

Personal checking accounts and business checking accounts are structured the same way and offer many of the same features. But there are a few key differences.

More information required

For one, a business owner needs to provide more information to sign up for a business bank account.

When you open a personal checking account, you typically need to show a valid, government-issued photo ID and provide your Social Security number, birth date, and contact information

When you open a business bank account, you need to provide all of the information above plus:

  • Your business’s EIN number

  • A copy of your business license

  • Organization documents filed with your state

  • Copies of your business bylaws or operating agreement

The exact requirements vary depending on your business structure, state laws, and the bank’s requirements. It’s a good idea to call the bank to determine exactly what information they need before you get started.

Higher fees

Some business checking accounts require higher minimum balances in order to avoid maintenance fees. Plus, the fees for business checking accounts tend to be higher than those of a personal checking account.

But don’t let that dissuade you from opening an account. Many online and brick-and-mortar banks offer checking accounts geared toward small businesses. If you shop around, you’re almost certain to find a business checking account with low or no minimum balance requirements and no maintenance fees.

Perks

Some business bank accounts come with perks that you won’t get from a personal checking account. These can include:

  • Purchase protection. For merchant accounts, banks usually provide purchase protection to ensure that your customers’ information is secure.

  • Line of credit. Some business checking accounts come with a line of credit you can tap if your business experiences a cash shortage. Learn all about line of credits here.

  • Business credit card. Some banks offer their business checking account holders business credit cards, which can help you build business credit and earn rewards.

Benefits of opening a business bank account

There are several reasons opening a business bank account is a smart move.

1. Better recordkeeping for tax time

Keeping your personal and business expenses separate gives you a clean record of business income and deductions at tax time.

Many small business owners learn this the hard way. After months of using one checking account for groceries, utilities, personal and business expenses, it’s nearly impossible to figure out which transactions are deductible and which aren’t.

Keeping your business and personal accounts separate makes it easy for you (and your bookkeeper) to clearly identify all business income and expenses.

2. Liability protection

If you formed an LLC or corporation for your business, then you’re actually required to keep your business and personal finances separate.

That’s because LLCs and corporations are considered separate legal entities from their owners. In fact, that’s probably why you chose that business structure. It provides some legal protection because debts, lawsuits and other claims against the business are limited to the business assets. Creditors can’t pursue the owner’s personal assets under most circumstances. Learn more about LLC’s and how to start one in our guide.

However, if your business is sued, the plaintiff can use the fact that you commingled personal and business finances against you to go after your personal assets. Having a separate business bank account helps maintain that liability protection.

3. Credibility

Finally, using a business bank account just looks more professional. When a vendor or contractor receives a personal check, they may not take you as seriously as you would like. Likewise, it looks amateurish to ask your customers to make their checks out to your name instead of your business name.

Having a business checking account gives you a more qualified and capable look.

Further reading: How to Open a Business Bank Account

How to manage a business checking account

Once you’ve decided to open a business bank account, you need to ensure you have the right processes to keep your business and personal expenses separate. Here are a few tips:

  • Send all business income to your business checking account. Depending on the type of business you own, your customers might pay you several different ways: check, ACH, cash, credit card, PayPal, etc. No matter how your clients pay you, make sure the money goes into your business checking account.

  • Pay all business expenses from your business checking account. Use your debit card, business credit card, and business checkbook only for business expenses. If you have any recurring subscriptions, update your payment preferences to pay from your business account. Don’t forget to input these transactions into an expense tracker if you have one or get started on one of our six recommended expense trackers.

  • Monitor your accounts. Stay on top of your bookkeeping each month so you can spot any personal transactions that hit your business checking account and vice versa. Working with Bench means your dedicated bookkeeper will notice right away if any unusual transactions come up and categorize them appropriately. Learn more and start a free trial today.

  • Pay yourself appropriately. How to pay yourself as a business owner depends on how your business is structured. If your business is a corporation, you might have a regular salary. Otherwise, you probably take draws from the company as you see fit. Just make sure you’re using your draw or salary to pay personal expenses rather than paying them directly from your business bank account. For further reading on salary vs draws, check out our blog post.

  • Realize mistakes happen. Every business owner has accidentally used their business card to pay for a personal expense. There are two ways to handle this: 1) make sure the cost is classified as an owner’s draw in your books rather than a business expense, or 2) write a check from your personal account to reimburse the business. Likewise, you might accidentally use your personal account to pay for a business expense. In that case, make sure to record the expense in your books as an owner contribution.

So what happens if you’ve been using your personal bank account for business? It’s not too late to make a switch! Open your business bank account and start separating your business and personal transactions going forward.

If you’re already sitting on a mountain of past transactions that need to be sorted into business and personal, that can be a labor-intensive job. Fortunately, the bookkeepers at BenchRetro are experts at combing through old bank statements to get business owners caught up and in the clear. Book a call today to learn more about how they can help get your books caught up.

As a small business owner, it can be hard to tell where your work life ends and your personal life begins. But when it comes to commingling business and personal expenses, drawing that line is important. Setting up a business bank account and having a reliable system for keeping your books in order makes keeping your business and personal expenses–and resolving the occasional blunder–a whole lot easier. If you’re ready to make the move, read our checklist of documents you need to apply for a business bank account.

Additional resources

Learn more about business essentials

Check out other helpful resources for when starting a business

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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