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As you start your business, there’s a lot on your to-do list, including managing your finances. You may assume that using your personal checking account for business purposes would suffice, but there are some reasons that might not be the best idea in the long run.Here, we’ll look at the key differences between a business account vs. personal account, look at which could be right for your company, and some strategies for how you can find the right bank for your business needs.
Business Account vs. Personal Account: What’s the Difference?It’s important to understand the difference between personal and business bank accounts, because each provides specific benefits for specific situations.A personal checking account is for your use as a consumer, and a business checking account is for business-related transactions. With a personal account, you would pay personal bills, make purchases with a debit card, write checks, and manage your personal expenses and income. With a business account, you accept payments for your business and pay your vendors and business expenses.Some checking accounts are only for certain types of business structures, like corporations, LLCs, partnerships, or sole proprietorships. A business bank account may require a higher daily average balance than a personal one, and may have different features, like wire transfers or merchant services so you can accept payments via credit card. A business checking account may have a higher fee than a personal one, which may be more difficult to waive.The differences between a business account vs. personal account may not seem significant, but they can impact how you manage your company finances and how much time you spend doing so.
Should I Use My Personal Account for Business?It seems like the simplest thing to do would be to go on using your existing personal bank account for your business finances, right? Probably not.There are many reasons why using a personal account for business purposes may cause more headaches than benefits. First of all, if you are using accounting software to manage your business expenses and income, having both business and personal transactions in one account can make it hard to separate them out. The software automatically downloads your banking transactions and won’t know which are business-related, so you will manually have to organize them. That’s more work for you or your accountant.Also, using your personal account for business purposes can make filing your business taxes complicated, whether you file them yourself or work with an accountant or CPA. Typically a CPA will ask for your profit and loss report generated by your accounting software. If you’ve got your personal car payment, grocery store expenses, and other personal expenses mixed in with business transactions, it can take a while to unknot them so you can properly file your taxes. If you happen to make an error because of this, you could risk being audited by the IRS, which can be a costly and time-consuming headache.
Reasons to Have a Business Bank AccountHaving a business bank account vs. personal account can make it easier to track where money is being spent, which helps you keep better tabs on your expenses. If you operate as an LLC or corporation, you are considered a separate entity from your business, so your bank accounts should be separate as well.
People Typically Want to Give Money to Businesses, Not IndividualsAnother reason to have a separate account? Credibility. People typically feel more comfortable writing a check to a business rather than an individual, but if you use your personal account, that’s what they’ll have to do. Filing a Doing Business As (DBA) form in your state will let you be able to accept payments under a business name, provided you open a bank account under that name. You may be required to present this document when opening a business account.
It Can Help Make Finding Financing EasierIf you ever choose to apply for a business loan or even credit cards for small businesses, you may be required to have a business checking account. Establishing a relationship with a bank before you apply for a loan can potentially be beneficial. Also, as a long-term business customer of a particular bank, you may qualify for better rates than newer customers.
It Can Help You Build Business CreditYou know you have personal credit scores and a credit report, but did you realize your business also has credit scores? Some lenders look at these when you apply for a loan or line of credit, but if you have no business checking account or business credit cards, you may have little to no business banking or credit history. Using business credit cards to pay for business expenses and then paying them off in a timely manner may also help you build your business credit, which may be helpful should you want to expand your business with a loan.
Merchant Services Require ItIf you want to accept debit and credit cards for transactions in your business, the merchant services company may require you to have a merchant account. This is a specific type of business bank account that can accept payment via credit or debit cards.
Features of a Business Checking AccountFeatures of business bank accounts may vary from one bank to another, and from one type of account to another. Business checking accounts tend to have higher daily balance requirements than personal accounts, as well as different tiers of transactions or cash deposits allowed with each type of account.Monthly fees vary, and some banks will waive them if either you maintain a specified daily average balance or link to other accounts at the same bank. Some accounts allow you to add other users to the account or have access to a business debit card.Some banks now offer add-on services that appeal to small businesses, such as invoicing, payment processing, and payroll services.Just like with a personal checking account, you get access to business checks with a business checking account. The difference between personal and business checks is that business checks look more professional and can be printed out. They may also come with enhanced security features.If you have a personal account at the same bank, it is generally relatively easy to transfer money from the business account to the personal account.And finally, if you expect to have a large daily balance in your account, you could consider a business money market account, which generally earns more interest than a checking or savings account. It’s possible that your bank may set withdrawal limits on money market accounts, so it’s important to check these details when you open the account.
Should I Use the Same Bank for Personal and Business Accounts?This is a great question, and sometimes it makes sense to have all your personal and business accounts at the same bank. Banks may waive fees on one or more accounts when you have multiple, and it can make it easier to transfer money between accounts.That being said, it shouldn’t be a given that you open your business account at the same bank as your personal account. It’s generally worth looking around to see what else is out there. You may be able to find an account elsewhere that has lower fees or other services that your business needs. In addition to traditional brick-and-mortar banks, there are many newer online banks that provide a wealth of services at a fraction of the price.
Choosing the Best Bank Account for Your Business NeedsWhen you start shopping for business checking accounts, here are some helpful questions to consider:
Something to consider in your search is whether you also want to open a business savings account. Some business savings accounts can be paired with a checking account that serves all your needs. It may be useful to be able to transfer some of your monthly revenues to this savings account for a rainy day where your money will earn interest.
- Is it important for you to have your business and personal accounts at the same bank?
- Will you have regular cash deposits?
- Do you plan to visit a bank branch in-person?
- Do you do most of your banking online?
- Is it necessary to have a relationship with a business banker?
- Are there other financial services you need now or down the road?
What You Need to Open a Business Bank AccountOnce you decide where you want to open a business checking account, get everything you need before applying. Some banks will let you apply online, but others may require an in-person visit or appointment. Read through the bank’s requirements to see what specifically is needed to open an account. Generally, you will be asked for:
- Your Employer Identification Number (EIN) or Social Security number if you operate as a sole proprietorship
- Your business formation documents if you operate as an LLC or corporation. For sole proprietors or partnerships, you will need to provide your Doing Business As (DBA) or Fictitious Business Name document.
- Details on ownership
- Business license
Managing Your Business Finances WiselyHaving a separate business bank account helps make accounting, forecasting, and tax time much easier than having everything in your personal account. But think about the big picture when choosing where to open your account, as well as what type of business checking account you want (many banks offer multiple accounts at different tiers of service). You want a bank that not only offers the features you need, but also one known for great customer service. Spend time reading bank reviews, and ask others for referrals.
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About the Author
Susan Guillory is the President of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.