When you’re just starting a business, your to-do list feels miles long. You need to create products or services to sell, set prices, advertise, attract customers, and actually do the work. So opening a separate business bank account, especially in the very early days, can feel like something that can wait.
It can’t.
As soon as you create your business, it needs its own bank account for seven important reasons.
Reason #1: A Business Bank Account Will Make Everything Easier.
Starting a business is hard. Keeping that business going is even harder. Anything you can do to make your life easier, do.
Opening a business bank account will be easier for bookkeeping. Easier to accept payments. Easier to get business loans and credit cards. Easier to do your taxes.
Plus, as your business grows, you’ll be able to have other people access the account to manage the deposits or bill paying – something you wouldn’t do with your personal account.
It takes less than an hour to set up a business bank account. Your first step is getting an EIN, or employer identification number, from the IRS. (Yes, even if you don’t have any employees.) If your business is a sole proprietorship, you may be able to use your Social Security number to open the account, but some banks may still request an EIN.
Depending on your specific business, you may also need to provide the bank with a business license, a formal ownership agreement (for any corporation or business with more than one owner), and any business formation documents (like incorporation papers, for example). You’ll also need to provide a driver’s license (or other acceptable ID). Once you have all that ready, you can apply for your business bank account online or in person.
Reason #2: You’ll Have No Trouble Tracking Income and Expenses
When all the money runs through a separate business bank account, it’s super easy to track the money flowing in and out.
Things get overcomplicated when you run business money through your regular personal bank account. Then you have to sort through every transaction. Figure out which ones are business and which are personal. Create a spreadsheet to capture everything that goes to the business.
If you’re lucky, you won’t miss anything. And all of your business income and expenses will be properly accounted for. But that leaves room for mistakes. Missed business transactions. Personal transactions put the business in error.
And what about things like account maintenance fees for example? Would those count as business or personal expenses? Both, actually, and you’d have to split them up every single month.
But with a dedicated business bank account, every transaction is a business transaction. No math needed. No figuring out if it belongs. That means time saved. Aggravation avoided. Life is easier.
Reason #3: A Business Bank Account Can Save You Money
Having a dedicated business bank account can save you money on top of saving you time.
Consider this: A customer wants to pay you by ACH (direct debit to a bank account). That means you’ll have to give them your personal banking information if you want to get paid.
If you don’t want to do that, you’ll have to accept a check or credit card or PayPal or some other form of payment. Checks are easy to deposit but can take time to clear… time many new small businesses don’t have in terms of cash flow. Credit card and PayPal payments come with fees, so you get less money.
Another thing: With a business bank account, you can accept credit card payments if you want to, but you can’t do that with personal bank accounts. Though you will have to pay fees, it does make it easier for customers to pay you. That can speed up payments and improve your company cash flow.
Reason #4: You’ll Have Better Access to Business Loans and Credit Cards
Establishing a business bank account is your first step toward building a credit history for your company. It’s also foundational toward building a business relationship with the bank. Business bank accounts may come with the option for a credit line, giving you an extra resource when cash flow doesn’t quite work out.
With a business bank account you’ll have easier access to business credit cards, lines of credit, and loans. Many lenders specifically require that any business applying for a loan have a business checking account. They’ll want to
- Understand your company’s cash flow, meaning how money moves in and out of the business
- Look at transactions for a period of time, often 6 to 12 months
- Get a sense of your company’s financial stability
- Possibly require autopay set up for loan payments, depending on the company’s time in business and credit history
Banks prioritize their own customers’ loan and credit card applications, giving you an edge when your company needs to borrow money.
Reason #5: You Won’t Have to Scrounge Around for Records At Tax Time
Small business taxes require a detailed accounting of income and expenses. With a separate business bank account, that information will be right there for you. Whether you do your own taxes or use a tax pro, tax time will be much less stressful when all the data you need is in one place and doesn’t need to be hunted down.
Every transaction you’ve made during the year will appear on the bank statements. Many banks also offer year-end summaries for their business clients, making the information even easier to read.
Just as important, maybe even more, you’ll be able to see how your business is doing at a glance. You’ll always know how much money is coming in and how much you’re paying out.
Reason #6: It Reinforces the Company’s Credibility
Having a dedicated business bank account makes your company seem more established and dependable to customers, vendors, and lenders. That’s true even if you run a freelance business from your bedroom while wearing pajamas.
A bank account in the company’s name adds an air of credibility and reinforces your commitment to create a successful business. It announces that you’re not treating the business as a hobby. Seeing the company name on official documents makes it seem established, even if you’ve just started up.
Reason #7: It Preserves and Protects Your Limited Liability
If your business is set up as a corporation or an LLC, you must maintain a separate business bank account. The limited liability protection depends on you and your business being completely independent entities. And that won’t happen if you’re sharing a bank account.
The limited liability shield protects your personal assets if someone sues your business and protects your business if some sues you personally. But if the person suing can claim that you and your business are not truly separate entities, that limited liability shield will crack wide open. Not maintaining a separate bank account for your business can serve as proof for that.
So it’s critical for your protection to have a business bank account. And to only use that account for business expenses. If you need money from the business to pay your personal bills, transfer the money to your personal account and pay those bills from there.
Want More Information on Opening a Business Bank Account and Launching a Successful Business?
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