As the owner of a business, you should know all the benefits of having a business bank account. Most people just starting off with a business might prefer to use their personal accounts for their business finances. This takes away the hassle of using multiple accounts at the same time.
That being said, mixing your personal and business finances might not always be a good idea. Read on to find out some business bank account benefits, and how not opening one can affect your personal finances.
Note: If you want to open the best business bank account on the market for professionals, try Bonsai's business account. It's easy to set up and great way to save, spend, and manage your business funds. Sign up today to get started.
What Is Business Bank Account?
Business bank accounts are the types of accounts used by sole traders and commercial traders in order to keep track of their business transactions. They are very helpful in keeping personal and business transactions separate.
A business bank account is used for accepting payments from customers, but also for paying vendors and potential employees. It separates your business debt from your own, which can offer you personal liability in the long run.
Does Your Business Need a Business Account?
Depending on the kind of business that you are running, you may or may not be legally required to open a business bank account. For instance, if you have a sole proprietorship with no DBA, then you are not legally bound to open a business bank account. You can just use a personal account that is in your name.
However, if you are a sole proprietor with a DBA, an LLC owner, or the owner of a corporation, it is required by the law to have a separate business bank account. You cannot use a personal bank account in these circumstances.
Read more about the best bank accounts to open for business.
Why Is It Important to Have a Business Bank Account?
A dedicated account for your business is important as it can bring the following advantages:
It Is Required to Form a Partnership or Corporation
Perhaps one of the most important reasons for getting business accounts is that you need them in order to form a partnership or a corporation.
When you have a sole proprietorship without a DBA, with only your name on it, your personal funds and business finances are pretty much placed together.
Things change when the name of the company is different from yours.
When you are a partner or the owner of a corporation, it will not only be your name there. The names of your partners will be involved as well, which means you cannot use your personal account for your business finances. The business structure requires you to get an actual business account. A business bank account solves the problem for having separate records for your legal entity.
Easy Business Bookkeeping
When you are the owner of a sole proprietorship and are using your personal bank account, there is a high chance that you will get mixed up in your expenses.
For instance, when you are making your calculations for your tax return, it might be difficult to know whether that meal you paid for was a business meal or a personal one. As a result, you may not know if it's deductible or not.
On the other hand, if you keep your business expenses in a dedicated business bank account, it is much easier to keep track of receipts for taxes and everything else.
You Get Access to Business Loans
If you make all of your business payments through a personal bank account, the most you will likely get is a personal loan. If you want to get a business loan, then you'll need a business checking account open.
By opening a business account, you will also improve your business banking relationship with the financial institution. This will make it much more likely for you to get your hands on a credit line. Business account records allow you to show self-employed proof of income so you can get more credit because creditors will trust you more.
You Become Legitimate to the IRS
Let's say that you are a business owner, and you get audited by the IRS for certain deductions that you tried to claim. If you have a business bank account, then you can prove to the IRS that you are a legit business and that you do not consider it a hobby.
It Creates a Professional Image
If you need to write a check in order to pay for business expenses, then a business account might make you appear more professional. If they see that the money comes from your personal finances, the people you are collaborating with might not take you seriously.
A business bank account makes you seem like someone who is actually serious about what they are doing. It expresses that you are in it for the long term and that it is not just a hobby you are planning to take on now and again.
It Protects Your Personal Identity
As the owner of a business, the chances are high that you will be using your checking account for a number of personal and business expenses. The problem is that if you use a business account or one that mixes your business account, the chances for identity theft and fraudulent activity are much higher.
However, the risk is lower if you use business bank accounts, as your personal information won't be connected. A separate business bank account will only contain the information of your business, which means that your name and your personal funds are protected.
Things are even safer if you get an EIN (Employer Identification Number) from the IRSfeorm . This way, you won't have to put your social security number down anymore; you'll just need your EIN. As a result, any potential thief will not have access to your personal bank accounts.
It Permits Credit Card Payments
The problem with personal bank accounts is that you can't accept credit card payments - but you can if you are using business accounts. We've reached a point in our economy when everyone pays for personal and business expenses using credit cards - so, you need to make sure that your own business can accept credit cards as well.
Consequences of Not Opening a Business Account
If the law does not require you to get a business account, you might feel tempted to just keep your business banking in your personal accounts. However, there are certain disadvantages to this, as follows:
You Can't Get a Business Loan
If you are looking to get a small business loan, you won't be able to do so unless you get a business bank account. As the owner of a personal account, all you will be able to get is a personal loan.
As small a matter as it may seem, a business checking account can help you expand your business by giving you access to a small business loan. Throw in a savings account as well, and you will certainly seem reliable enough to the financial institutions.
Keeping Records Can Be Complicated
Using the same bank account for both personal and business purposes might overcomplicate keeping your business records. This happens especially if you also use your credit card a lot for personal purposes.
Imagine you have to file taxes at the end of the year, and you have to separate your personal transactions from your business ones. It would be like looking for a needle in a haystack. A separate checking account for your business will make it much easier for you to keep things in order.
Higher Fraud Likelihood
As your bank accounts will get more activity, this will increase the chances of fraud. This can be unintentional, or it can occur as a result of someone hacking the designated account for your business.
That being said, if you get actual designated business bank accounts, potential scammers will have to go through a whole number of layers and complications in order to get to your personal information. By the time this happens, you would have already solved your security problem.
Documents Needed for Opening a Business Bank Account
Once you've determined what business bank account you wish to open, you need to gather the information for the account. Here is what you need to bring to the bank:
- Your legal business name. It can be the name of your company as it appears registered to the IRS.
- If your corporation is an LLC, the bank will need your EIN, as proof that you are legitimate.
- Contact information, such as your business website, email, address, or P.O. box.
- Your own information, such as phone number and driver's license number.
- Proof of identity, such as an ID card or a passport
- Business license, if your business needs one
- Articles of Incorporation, if your business is an S-Corporation or a C-Corporation
- Articles of Organization, if your business is an LLC
- A partnership agreement, if you are running a business partnership
As long as you are thorough with your documentation and you offer them all the information that they need, the process itself should be smooth.
Try Bonsai's business account
If you need a business bank account that is easy to set up and will help you organize your funds for taxes, try Bonsai's business account. Our business account has no hidden fees and will give you access to a suite of freelancer tools such as invoice, contract and proposal templates.
With our "envelopes" feature you can create separate savings accounts for retirement, taxes, or even vacations. You would also get access to a virtual or physical debit card you can use to purchase stuff for your business and organize your expenses for when tax season rolls around.
See for yourself how simple it is to set up. Open an account today.
FAQ
Opening a business bank account might come with a couple of questions. Here are some common questions, along with their answers.
- What Is the Point of a Business Account?
The point of getting a separate business bank account is that it helps you differentiate your personal expenses from your business expenses. A business bank account will help you keep track of your business transactions, without getting all lost in your personal ones.
- Is a Business Account Worth It?
Many people say it's worth it to get a business account, as it makes their finances easier and adds credibility to the business. While you may have to pay a few maintenance fees, depending on the account that you are getting, it will also make your job much easier.
- Do I Need to Get Both Checking and Savings Account?
While savings accounts are not mandatory by the law, they are still highly recommended. The savings allow you to protect your assets, but it will also give you some funds to grab onto in case of an emergency.
The necessity will also depend on the bank that you are working with. For instance, while some banks allow you to open a business checking account without a savings account, others make the latter a requirement. You might want to discuss these matters with your bank first.
- Will I Still Be Liable If I Have a Business Bank Account?
If you use the business bank account solely for business purposes, then you might not be held liable for business debt. However, if you use the account for personal purposes as well, then there is a chance you might be held liable.
The Bottom Line
Business bank accounts might not seem like much of a great deal at first, but in the long run, a dedicated business account can help you expand.
It protects your personal assets, strengthens your business credibility, and makes it easier for you to keep financial records. You just need to find the right business account for you.
