At first blush, using the same account for your business and personal finances seems simple and inexpensive. However, if you have an active business, consider opening and maintaining designated business bank accounts. Separate business accounts help you track business expenses, present a more professional business image, and take advantage of tax deductions and credits available to small business owners while avoiding tax and accounting problems.
Not every business needs a business banking account. If you have no employees and only a few transactions per month, you can probably get away without one. For example, if you occasionally take on freelance assignments, your personal checking account may be just fine for receiving the payments.
As your business grows and becomes more consistent, though, you should consider opening a dedicated business bank account. You generally need a separate account if any of the following are true:
The IRS requires incorporated businesses to have a business bank account. For unincorporated businesses, the ability to get a business loan and accept payments by credit card further underscores the need to have a business bank account.
The best bank account for you depends on your business. For example, if you anticipate completing a significant number of business checking transactions each month, look for a bank that offers a checking account option with a high transaction limit before incurring fees.
Regardless of the type of business you run, be sure to ask these questions before you apply for an account.
Most business bank accounts will charge some types of fees and maintain a list of minimum requirements. The following fees and requirements are typical for business accounts:
Many banks promote introductory offers as a way to entice business owners to open a business account at their institution. Some offers include bonus cash for making an initial deposit of a certain sum and maintaining the balance for a certain period of time (typically a few months). Others offer lower fees to businesses opening new accounts. If the bank and its account features tick your other boxes, you’re not likely to go wrong by opening your business bank account at an institution with a strong introductory offer.
Customers now expect to be able to monitor accounts and do banking online. However, all websites are not equal in ease of use and dependability. Check out the website and see how you think it will work for you. Most financial institutions offer mobile device apps so you can monitor your balance, transfer funds between accounts, pay bills and check on your cash flow. Check out the app and make sure it works well for you and with your device.
To accept credit and debit card payments from customers, you need merchant services. Third-party processors offer this service (and usually have lower rates), but it may be more convenient and efficient to use a bank. Find out if the bank you’re considering offers merchant processing services and whether the terms and rates are better than those of third-party providers.
Along with a business checking account, you should have a business credit card account for business purchases. Interest rates and other credit card terms vary, so shop around. Consider establishing a business line of credit (a source of funds you can access on an as-needed basis) or securing a small business loan as well. Doing so may be easier at the bank where you have a business checking account, since it already has access to much of the documentation needed when applying for a loan. [Read related article: The Small Business Owners’ Guide to Getting an SBA Loan]
It can be beneficial to have a local branch nearby in case you ever need to do your banking in person. If you are attracted by the lower fees and convenience of an online business checking or savings account, consider the trade-offs, such as having to deposit checks online. If you need to deposit many cash transactions or you want to be able to speak to a representative face to face when you need help, you may need a brick-and-mortar bank.
The Federal Deposit Insurance Corporation (FDIC) provides financial institutions with insurance for all types of deposits, including, but not limited to, checking and savings account deposits. Make sure your bank is FDIC insured.
After you choose a financial institution, opening the account isn’t difficult. Just head to a local branch of the bank you’ve selected or log on to its website. You need certain documents and information on hand, depending on how your business is structured.
If your business is an LLC or corporation, the bank may also require you to provide:
Be ready to provide both personal and business information and documents when you go to open your business bank accounts. With all of these in hand, the process should be smooth.
Business bank accounts offer the following four advantages.
Keeping personal finances separate from business finances by establishing a business bank account helps safeguard business and personal funds. For instance, if your business is set up as an LLC, your personal assets won’t be in jeopardy if your business can’t pay its debts, unless you signed a personal guarantee. (Consult with a lawyer about your situation.)
In addition, your business credit score won’t be negatively impacted if you suffer a personal financial crisis or setback.
Tracking expenses, monitoring spending and avoiding inadvertent overspending – all of which figure heavily into the success of any small business – are easier with a separate business bank account. So too is generating reports and statements that reflect the current status of your business and important trends.
Separating business expenses from personal expenses is necessary to take full advantage of business tax deductions without triggering an audit. [Read related article: What Is a Tax Audit? What Do You Do If You Get Audited?]
Another consideration is that if you have a type of business that the IRS may consider to be a hobby, one way you can demonstrate that you are operating as a business is to have business bank accounts.
With a business bank account, customers and clients can make checks out to your business rather than to you and pay with a credit or debit card. This gives your business a more professional image.
Like personal bank accounts, business bank accounts fall into several categories. Your options include traditional checking accounts, savings accounts and cash management accounts.
A business checking account lets you handle all the essential financial tasks of operating your business. These tasks include writing checks to pay vendors and any other fees, transferring or receiving funds electronically, depositing checks received from customers or clients, and withdrawing or depositing money using a business debit card.
Many banks offer interest bearing business checking accounts. These accounts have the same standard features as regular business checking accounts, but you can earn an annual percentage yield. The trade-off with interest bearing accounts is that they often carry fees.
Free small business checking accounts that cater to new and small businesses may be perfect if you’re just starting out, but they may restrict your number of transactions per month. Free accounts also may have minimum deposit requirements.
A business savings account complements a business checking account. With it, you’re able to set aside a portion of your business’s earnings into an account that pays interest.
A savings account helps you separate business savings from working capital, making day-to-day financial management easier. Keeping money in a savings account gives you a financial cushion in case of an emergency, such as an unexpected expenditure, without tapping into your personal funds.
A cash management account (CMA) is an online account that provides the services of a checking, savings and investment account, all rolled into one.
Most CMAs offer high interest rates on savings and lower fees than traditional brick-and-mortar banks and business lines of credit. You can conduct all your business banking affairs from a CMA.
Types of business bank accounts include checking, savings and cash management.
Most banks automatically open an account for savings when you open a checking account. The savings account lets you access funds as needed. The savings also protect your assets, since each account has an insurance limit. As an example, the federal government will insure money in each account up to $250,000 per owner. If you have a checking and savings account, each one can safely hold up to $250,000 per owner.
You can also use a savings account to set aside funds for special purposes. For example, many companies keep money in a savings account to earn interest while setting aside money for expenses like federal taxes.
A free business checking account doesn’t incur a bank monthly maintenance fee. It may still incur other fees. In most cases, you must maintain a minimum balance to avoid the fee. Chase Bank, for example, requires the account holder to maintain a balance of $2,000 for a free business account.
Many business owners find it convenient and fast to open a business bank account online, regardless of whether it’s an online or brick-and-mortar bank. If you’re concerned about security, all paperwork filed online for a new business bank account is done over a secure and encrypted connection.
Banks are for-profit institutions, while credit unions are categorized as nonprofits. Credit unions typically offer better rates and lower fees. Membership is typically required to become part of a credit union.
There’s a difference between earning a few dollars on the side and starting a business with an intent to grow and make a profit. Opening business bank accounts is just one important step to getting serious about your business and setting your business up to be successful for many years to come.