Learn why opening a separate business bank account is crucial for your business and your financial sanity.
When you start a business, you always look for ways to simplify things. You might set up an online calendar so clients can easily book meetings with you, or outsource administrative tasks that you don’t enjoy doing.
But when it comes to simplifying things with your money, opening up a business bank account is crucial for business success as a small business owner. Keeping your business expenses separate from your personal funds will actually make it simpler and easier to manage your business as it grows.
Here’s what you need to know about the key benefits of having a business bank account, as well as what to look for when picking the right checking account for your business.
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What Is a Business Bank Account Used For?
A business bank account is an account that is used solely for transactions related to your business. You can have both a business checking account and a business savings account.
Having a separate business bank account makes it easier to distinguish between your personal and business transactions, and it simplifies your bookkeeping process too.
5 Benefits of a Business Bank Account
Here are the top reasons why you should open a business bank account for all your business finances:
1. Limit Your Personal Liability
When opening a business, many business owners choose to set up a limited liability company (LLC) or a corporation to limit their personal liability in the business. Having an LLC or a corporation separates your business and personal assets. But to keep this liability protection intact, you need to follow certain rules. Otherwise, you could be at risk of “piercing the corporate veil”—a situation where you could be personally liable for your business debts.
One rule you need to follow to keep the corporate veil intact is to keep your business and personal finances separate. Having a dedicated business bank account helps you do that.
2. Organize Your Business Records
While combining your business and personal money in one checking account may seem easier, it can put you in a bad spot come tax time.
That’s because it’s incredibly challenging to do accurate bookkeeping when you have to sort through hundreds of transactions in your personal bank account—like trips to the grocery store—just to find one business expense. It not only takes a lot of time, but you could miss important business tax deductions, which can end up costing you a lot of money when you file taxes at the end of the year.
Opening a business account that’s separate from your personal account will simplify things for your and your tax professional in the future.
3. Establish Credibility With Clients
When building trust with clients and future clients, it’s important to treat your business like a business—not like an extension of your personal life. When you’re running a small business, it can look unprofessional to pay your contractors with a personal check or have your clients write a check to you as an individual.
Will this lose you business? Maybe not. But having a dedicated business banking account that’s separate from your personal accounts shows that you’re a serious professional. This is especially important as you scale your operations and evolve from freelancer to business owner.
4. Monitor Business Progress
One of the best things you can do to establish a healthy business is to monitor its growth and look for opportunities. Monitoring your business financials is a big part of that.
Keeping your business account separate from your personal bank account lets you check in and check on your financial records regularly, so you can make plans to improve and grow.
5. Hobby or Business?
The IRS has 9 factors that determine whether your business is actually a business, or whether it’s really just a hobby. The first factor on that list: “Whether you carry on the activity in a businesslike manner, and maintain complete and accurate books and records.”
Those criteria will be easier to prove if you have a separate business account.
What Is a Good Bank for a Business Account?
This section will go over what someone should look for when choosing between different business checking accounts. Consider monthly maintenance fees, ease of performing activities (like depositing checks), minimums, cash, and transaction limits, as well as how easily the different business accounts integrate with programs you already use.
Not all banks are created equal when it comes to business bank accounts. You’ll want to do your research before deciding which bank is best for your small business. Some things to consider include:
- Fees: Some banks charge a fee for everything—a fee for depositing a check, monthly service fees, a fee for having a small balance. Get a full listing of fees before you decide to give a bank your business.
- Minimums: Do you need to keep a minimum monthly balance in your bank account? That may be tough for some businesses, specifically in the beginning. A bank that doesn’t have any minimum balance requirements may be a better option.
- Transaction limits: Some banks have transaction limits that may be challenging for your business. For example, if you make a lot of different cash and check deposits daily, you’ll want to look for a bank that doesn’t have a low daily limit on your business transactions. Otherwise, you’ll find yourself paying for transaction fees too.
- Additional debit cards: If you have employees and want to allow one of your employees access to your debit card, check with a bank to see what they offer. You’ll want to look for a bank that offers multiple debit cardholders for an account and also the ability to put limits on the employee’s debit card, so they can’t withdraw or spend more money than you approve.
- Ease of integration: Finding a bank that easily integrates with the accounting and budgeting software you use can make running your business much easier.
What Do You Need to Open Your First Business Bank Account?
Before heading down to the bank to open a business bank account (or applying online), spend some time gathering the documents and personal information that you need. Depending on your business structure, you won’t need all of the documents listed below, but this list should give you a starting point:
- EIN or federal tax ID: If your business is a sole proprietorship, you won’t need an employer identification number (EIN), but you can still provide one if you have it. For all other business types, you’ll need to provide your EIN to open a bank account.
- Articles of organization or incorporation: If your company is an LLC or an incorporated business, be prepared to provide your articles of organization or incorporation, whichever you filed with your state when you registered your business.
- Certificate of good standing: Your bank may require a certificate of good standing from your state, showing that you are up to date on taxes and other requirements.
- Personal identification: Photo ID is often required to verify your identity when opening any bank account.
- Copy of your DBA filed with the state: If you run your business using a DBA (doing business as), your bank will want to see a copy of the DBA filed with the state.
- Copy of partnership agreement: If your business is organized with a partnership, be prepared to provide your bank with a copy of the partnership agreement.
- Business license: If your state or local government requires you to have a business license, your bank may want a copy of that license to ensure you’re authorized to do business in the state.
Are There Situations When You Don’t Need a Business Bank Account?
If you’re a sole proprietor, you’re technically not required to have a separate business bank account. However, it’s still a good idea to keep your money in a dedicated business account, rather than in your personal account.
While it won’t help you limit your personal liability—a sole proprietorship isn’t a separate legal entity and doesn’t have any personal liability protection—a business checking account will provide the other business bank account benefits listed above. It’ll keep you organized and looking like a credible small business, you can easily monitor your financial progress and business expenses, and it helps you look more like a business and less like a hobby.
A Last Thought on Business Bank Accounts
A business bank account is an important part of establishing yourself as a business. Take the time to set it up correctly at the beginning, and you’ll alleviate headaches down the road. As your small business grows, it’s crucial to build a proper legal and financial foundation—download a free business invoice template to aid in this as well.
Opening a separate bank account will help demonstrate the credibility of your business, keep your books organized, and ensure your business and personal lives remain separated. In addition, opening a business bank account will help establish your business banking relationship and business credit history—a significant milestone should you ever want to take out a small business loan or business line of credit in the future.
This post was updated in December 2021.