Do I Need a Business Bank Account?

November 30 , 2021

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• Business Banking

If you have begun the process of starting your own business, then you’ve likely experienced the receipt length list of tasks you need to complete to get your business off the ground. While it’s tempting and sometimes necessary, shorten the list, setting up how to manage your business finances is one task you should not skimp out on.  

As part of managing your business finances, you may be wondering do I need a business bank account? Read on to discover what makes a business bank account different and the benefits of opening one.

Personal vs. Business Bank Account

At first a business bank accounts seem to operate similarly to personal accounts. For both accounts, you can use the same banking institution, make deposits and withdrawals, make purchases and cash withdrawals with a debit card, and manage your finances through an online portal or application. However, there are some key differences including the associated fees, materials needed to open the account, and perks or benefits available. 

1. Business Bank Account Fees: While most personal bank accounts offer free accounts or accounts with a low monthly fee, most business accounts require fees or require that the account maintain a higher monthly balance to avoid fees. Thus, you should shop around to find an account that meets your needs and offers the lowest fees. When reviewing different types of business accounts look for introductory offers, interest rates for savings and checking, minimum account balances, early termination fees, interest rates for lines of credit, transaction fees, cash deposit limits, and bundled service offers. 
2. Opening a Business Bank Account: Before you begin the process of opening the account ensure that you have the proper documentation to save time and money. Most banks require you to provide: 

• A form of government identification like a valid, government issued photo ID, your Social Security number, date of birth, and contact information
• Employer Identification Number (EIN) (unless you’re a sole proprietorship in which case you only need your Social Security number)
• Organization or formation documents filed with your State
• Your ownership agreements or copies of business bylaws 
• Business license

3. Perks or Benefits: 

• Emergency Preparedness: Some business accounts offer a line of credit in case of emergencies. 
• Professionalism and Credibility: When writing or receiving checks, your business name will be prominently displayed on the check instead of your personal name.
• Protection:  Having a business account allows you to accept credit card payments from your customers and keeps their personal identification information safe. A separate account may also keep your personal assets safe from liability.
• Purchasing Power: If your business account offers holders a business credit card then you can begin to build your credit and maybe even earn rewards. 

Are You Legally Required to Open a Business Bank Account?

Whether you are legally required to open a business bank account depends on your business structure. Separately maintained bank accounts are required for companies who are separate legal entities or for companies who operate under a doing business as (DBA) name

1. Separate Legal Entities: Limited liability companies (LLCs) and corporations (C and S Corps) are separate legal entities that must maintain a separate business bank account. On the other hand, sole proprietorships and partnerships are not considered separate legal entities, and therefore, are generally not required to maintain separate accounts. 
2. DBA Name: However, some sole proprietorships and partnerships will be required to maintain a separate business account if they operate under a different name (e.g. legal name Jane Doe / DBA Jane’s Baked Goods).

Why Get a Business Checking Account?

If you’re a sole proprietor or partnership, you may be wondering why should get a business checking account especially since they often entail higher fees and more stringent paperwork. 

1. Tax Benefits

If you decide to commingle your personal and business transactions, you will be required to untangle the transactions and classify them as either personal or business in order to receive deductions. Not only can this be near to impossible after a year, it may also subject your personal transactions to scrutiny by the IRS. 

Further, as a small business owner, your income is not subject to withholding, and thus, you will be required to pay estimated taxes on a quarterly basis. Having a separate account helps to streamline this process without the need for analyzing each line item in a bank statement. 

In the case of an audit, you may also be required to show that your business is profitable. If you cannot show that you made a profit for at least three years out of five, you risk the IRS labeling your business as a hobby and disallowing you from deducting expenses or losses on your tax return. Thus, a separate account helps make clear your business gains and saves you money.

2. Liability Protection

One of the key assets of an LLC or corporation is the separation and protection of business and personal assets. However, if you mingle your personal and business assets, your personal finances may be held liable as it appears that your business is no longer a separate entity. Thus, keeping a separate account is crucial to ensure that your personal assets remain protected in case someone sues your business. 

3. Avoid Growing Pains

If you decide to transform your sole proprietorship or partnership to an LLC or corporation or decide to take on payroll employees, having an existing business bank account will streamline the process and help you avoid any delays. Further, having an account dedicated to your business will help you avoid overspending and project cash flow, so you feel confident to take the next step in your business.

Get Your Business Started with Eco-fyle

If you are still wondering, do I need to open a business bank account or feel overwhelmed at the prospect of adding setting up a business bank account and managing your business finances to your ever-growing to-do list. Schedule a call to learn how we can help you manage your business finances so you can focus on what really matters—the day-to-day operation of your business. Get started here with Eco-fyle today!