If you’re a small business owner or independent contractor, there’s probably a lot of overlap between your business and personal finances. As such, it can seem simplest to keep just one bank account – money from clients comes in, and all your expenses, business and personal, go out.
However, there are several key reasons why you should separate your business finances and personal finances, including the fact that it will help protect your personal assets and streamline your tax recordkeeping. Here are the top three reasons why you should open a bank account for your business:
1. It keeps the “corporate veil” intact to protect your personal assets.
Many small business owners form an LLC (Limited Liability Company) or Corporation because it helps shield their personal assets from things that might happen in the business – for example, if the business is sued or can’t pay its debts. This is known as a corporate veil since it puts some separation between the business owner(s) and the business.
In order to keep that personal liability protection, you need to properly maintain your LLC/Corporation and that includes keeping a sharp line between business and personal finances. Maintaining a business banking account is an important step to ensure that your business is its own entity and separate from you, the business owner.
In case your business is ever sued, the plaintiff may try to pierce your corporate veil by showing that you haven’t maintained your Corporation/LLC to the letter of the law. In this case, they can go after your personal assets. This is why it’s absolutely critical for LLCs and corporations to keep business finances completely separated from the personal.
2. A separate account helps avoid tax time woes
A combined personal/business account is messy, making it harder to organize your books come tax time. You may find yourself wading through all of your past year’s transactions, including trips to the grocery store, to find business expenses to write off. Having separate accounts streamlines your recordkeeping – saving you time and ensuring you won’t miss any legitimate deductions.
3. A banking account boosts your business’ legitimacy
When you’re running a business, it can look a tad unprofessional to pay your contractors with a personal check or have your clients write a check to you as an individual. Will this ever be a deal breaker? Probably not. But, having a dedicated business banking account can send the right signals as you scale your operations and evolve from freelancer to business owner.
As a side note, if you’re running your business as a sole proprietorship, you don’t legally need a separate bank account for your business, but it’s still a good idea for the second and third reasons. In addition, having a business banking account can help make your case to the IRS that you are indeed running a business and are entitled to deduct your business expenses should you ever be audited.
How to open a business bank account
If you’re ready to open a business bank account to manage your finances, it’s a relatively simple process. You can open a business account at the same bank where you already have a personal account. Or, if you belong to a professional group or organization, such as a group for writers, veterans, or performers, check if they offer access to business checking services through a specialized credit union. This can be a great option.
No matter where you choose to open your business account, you’ll need the following documentation:
- Your company’s EIN (or Federal Tax ID number). If you don’t already have an EIN for your business, you’ll need to get one from the IRS. You shouldn’t use your personal social security number to open a business account.
- If your business is structured as an LLC or Corporation, then you’ll most likely need your Articles of Organization/Articles of Incorporation that’s signed and stamped from the state. You may also need to show your Operating Agreement.
- In some cases, you may also need to get a certificate of good standing from the state. This documentation essentially says that your business is up to date on its state taxes and other requirements.
- If your business is structured as a sole proprietorship, you’ll need less documentation, since sole proprietors are considered more like consumers than a business. In this case, you’ll most likely need a Tax ID, social security number, as well as a DBA (Doing Business As) registration if you’re using a business name that is different than your personal name.
As you grow your business, it’s important to give it the proper legal and financial foundation. Opening a separate bank account won’t take too much of your time, and will help keep your books organized and ensure your business and personal lives remain separated. In addition, beginning a banking relationship with an institution will help form your business’ credit history should you ever want to take out a business loan or line of credit in the future.
About the Author: Nellie Akalp is a passionate entrepreneur, small business expert, professional speaker, author and mother of four. She is the Founder and CEO of CorpNet.com, an online legal document filing service and recognized Inc.5000 company. At CorpNet, Nellie assists entrepreneurs across all 50 states to start a business, incorporate, form an LLC, and apply for trademarks. She also offers free business compliance tools for any entrepreneur to utilize. Connect with Nellie on LinkedIn.