Guide To Starting A Business

19. Benefits of Having a Business Bank Account

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Running A Business

Benefits of Having a Business Bank Account

Mar 15, 2023 • 10 min read
Open a Business Bank Account
Table of Contents

      Whether you’ve just barely started a new business or you’ve been in business for several years, a business bank account is vital to both your sanity and your survival.

      In the early stages, you may not feel like it’s necessary and that you can, in your personal account, easily separate what needs to be tracked. But if you intend to make your business a long-term endeavor, it’s time to consider opening a business bank account.

      Having a business bank account saves you headaches in the short-term, but the benefits of a business bank account reach far beyond your first few years. After all, business bank accounts are more than simple money management tools. Many often come with nuanced software that streamline your bookkeeping, invoicing, and more to simplify the time you spend on financial administrative tasks.

      Overall, opening a business bank account allows small business owners to keep their business income and expenses separate from their personal finances, which is essential for reducing financial liability and staying organized for tax season. Here’s why you will most certainly need to create a business bank account.

      Why you need a business bank account.

      Business bank accounts aren’t just nice to have—they provide real benefits that ensure financial success in the long run. 

      It simplifies tax deductions.

      Instead of wading through personal purchases to extract business transactions as you track your cash flow or estimate your quarterly tax payments, having a dedicated business bank account allows you to identify exactly what you’ve purchased for the business. It also makes deductions much easier when it comes time to file your business taxes.

      It protects you and your business.

      For some business structures, like a limited liability company (LLC), limited liability partnership (LLP), or a corporation, the government requires the owner to have a separate bank account dedicated to business transactions.

      In the same vein, if you choose to mix your business assets with your personal assets and not open a separate business bank account, your liability protection becomes null and void, should your business be unable to pay a debt. Even if you run a sole proprietorship or partnership under your legal name and are not required by law to separate your finances, having a separate account will still provide better protection from financial audits come tax time.

      It enables you to accept credit card payments.

      Accepting credit card payments can be a huge boon for businesses, as it offers their customers greater choice in how they pay. However, credit card processing companies typically require a vendor to register a business bank account in order to use their platform and services. 

      It’s true that businesses can technically accept payment through peer-to-peer platforms like Venmo and PayPal. However, thanks to recent IRS regulations regarding 1099-K tax forms, if you solely accept payment through these platforms, this can quickly become the more complicated approach.

      It allows you to scale.

      Yes, opening a business account makes your business look more professional to investors, stakeholders, and even customers. But it also sets the foundation for you to establish a relationship with a trusted financial institution and build up your organization’s credit.

      Benefits of business accounts.

      Make tax season easier.

      If you plan to file taxes as a business and your bank accounts are not yet separate, buckle up. You’re going to have to separate every transaction and place it under business or personal. 

      With a business bank account, all your business transactions are in a central place. In addition, many banks allow you to connect your business account to popular business tax software that automatically tallies your income and categorizes expenses. If you’re importing a mix of personal and business transactions, this becomes a significantly more daunting task. Furthermore, using a business bank account—especially for businesses that the IRS may consider a hobby—demonstrates you are a legitimate, functioning business.

      It will save you a lot of time, hassle, and effort if you open a business bank account now, instead of wishing you had come tax season.

      Better track your cash flow.

      Opening and maintaining a business bank account gives you a comprehensive and clear picture of your business’ incomes and expenses. Having a shared business and personal account muddies the waters when it comes to providing an accurate picture of cash flow. Should you get audited, or should a financial institution need to crawl your transactions, having a business bank account ensures they won’t look through your personal, as well as business, purchases.

      Business bank accounts are built for owners and entrepreneurs. They include features that help you track income, quickly view balances, stay aware of outstanding payments, and plan for a successful financial future.

      Keep your deductions organized.

      Most businesses have multiple items they intend to deduct come tax season, and sifting through receipts to determine what’s deductible can easily suck up all of a business owner’s time. But if your personal and business bank accounts are one and the same, a review of your transactions to search for deductions suddenly explodes into a much bigger headache.

      When your personal and business transactions are in the same account, you run the very real risk of missing deductions entirely. With so many transactions, many of them are going to blend together—and some will get forgotten or lost. On the other hand, using a business bank account in tandem with a business tax software ensures you’ll get the deductions you’re entitled to, while reducing your risk of an IRS audit.

      Reduce the risk of an audit.

      Speaking of audits, no one likes the prospect of the IRS scrutinizing their financial records—and if you’re not separating your personal and business bank accounts, you may be inviting them to do just that. 

      With a shared personal and business account, it’s easy to make a mistake on filing taxes or assigning deductions like home office, mileage, and business meals. Accounting for that human error, the IRS may choose to audit you—even if your deductions are reasonable. During that audit, it may be more difficult to give proof of your claims to the IRS with a shared personal and business bank account.

      Furthermore, the IRS is very serious about classifying legitimate businesses from “hobby businesses.” Be aware of what factors the IRS will be looking for to make sure you don’t accidentally bring your business an unwanted audit.

      Protect your personal finances by separating your business liability.

      If your business is a sole proprietorship or partnership, you’re not legally required to establish a separate business entity. Therefore, you’re held personally responsible for any liabilities and debts the business incurs. 

      When you separate your business finances from your personal finances by opening a business bank account, you provide some protection to your personal assets and credits. You can also use more leverage to increase profits with a business bank account.

      True, establishing personal lines of credit, loans, and leases can be important for young businesses trying to establish healthy credit. But the end goal should always be to avoid personal guarantees and shift as much financial liability as possible to your business.

      It’s required (for some businesses).

      Whether or not it’s convenient, having a business bank account is required by law for certain business types. If your business is incorporated as an S Corp, C Corp, or LLC, you must have separate accounts. Why? Because corporations are considered separate entities from their owners. 

      Whether or not it’s required, the ability to protect your personal finances—should anything go wrong in your business—is a key advantage of maintaining separate business and personal accounts.

      If you are caught without a separate business bank account, you could be setting your business up for disaster and placing your personal assets at serious risk.

      It’s more professional.

      Do you want to be a reputable business? Think of how a business may be perceived if it issues personal checks instead of business checks. Some may even consider that a red flag and take their business elsewhere. By having a business bank account, on the other hand, you can issue checks in the business’ name (instead of your own) and improve your trustworthiness as a business entity.

      Choosing to open a business bank account provides the benefits of appearing credible, reliable, and professional to customers. As also mentioned above, business bank accounts are built with the functionality of additional features like invoicing tools, issuing and uploading receipts, integrations with tax or financial software, and more.

      The bottom line.

      As a small business owner, you have enough on your plate to deal with on a daily basis. By separating your personal and business bank accounts, you give yourself one less thing to worry about. No more trying to sort through and decide (or remember) which transaction goes into which bucket. 

      If you haven’t already, first take the time to become an official business. Then, do everything you can to completely separate your personal financials from business financials. It may be a headache right now, but later you will be glad you did it.

      About the author
      Sean Peek

      Sean Peek has written over 100 B2B-focused articles on various subjects including business technology, marketing and business finance. In addition to researching trends, reviewing products and writing articles that help small business owners, Sean runs a content marketing agency that creates high-quality editorial content for both B2B and B2C businesses.

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