When you’re starting a small business, there are a lot of important decisions to make. One of the most important is what type of bank account you should use. In today’s age of side hustles, freelancing, or opening a business from your makeshift home office, small business owners mistakenly believe that they can use their personal bank account to conduct business transactions. While technically you can use a personal account, it is almost always a huge mistake. So if you find yourself asking, “Do I need a business bank account?”, the answer is almost always YES.
In this blog post, we will outline the top 5 reasons you need a business bank account.
The first reason you need a business bank account is for tax purposes. When you file your taxes, the IRS will want to see a clear separation of your personal and business expenses. If you commingle your finances, it will be very difficult to track your business expenses at tax time, which can be costly.
While it’s possible to keep meticulous records and maximize your deductions through a personal account, it’s a time-consuming chore. The more likely result is too much time spent sorting through bank statements and too many tax dollars removed from your bottom line. Even worse, you’re increasing the chance for errors that result in penalties against you or your business.
A business bank account will help you stay organized and make tax time a breeze.
Bookkeeping / Accounting
Another reason to have a dedicated business bank account is for bookkeeping purposes. When you track your small business finances, it’s important to have all of your transactions in one place. This way, you can easily see how much money is coming in and going out of your business. Having a separate bank account for your business will make tracking expenses and income much easier.
It also opens the door to categorize expenses, connect your accounting software, and see real-time cash flow without spreadsheets and financial statements.
It probably goes without saying, but you want to look professional when conducting business transactions. If you use your personal bank account for business purposes, it can give the impression that your business is not legitimate. On the other hand, having a business bank account sends the message that you are serious about your small business, and that you are organized and professional. Much like a business email address, it subliminally builds credibility with customers and business partners.
Sometimes, business partners and vendors will check your business credit report to determine your rate. They might even decline your business if they don’t like what they see on a credit report. Without clearly defined business banking and financial data, there won’t be much credibility in your business credit report.
Build Business Credit
Speaking of business credit, it is very difficult to build it through a personal account. With a dedicated business bank account, you can properly manage expenses, payments, and invoices. Staying on time with payments will help you improve your business credit score, and it’s much easier to stay organized without personal finances clogging your statements. When it comes time to secure a loan or negotiate a better contract with a vendor, your business credit will play a major role.
Protection of Personal Assets
The most important reason to open a business bank account is to protect your personal assets. If you commingle your personal and business finances, you might put your personal assets at risk. Unfortunately, businesses can fail, face lawsuits, or struggle during difficult economic conditions—sometimes through no fault of the business owner. As a business owner, following your dreams and passion shouldn’t put your personal financial security at risk.
By keeping your business finances separate from your personal finances, you can protect your personal assets in the event that something goes wrong with your business.
How to Open a Business Bank Account
If you currently use a personal bank account to conduct your business, it’s not too late to course correct. You will likely see immediate benefits in organizing your finances and building your business credit simply by opening a dedicated business account. If you’re just starting your business, now is the time to find a banking partner.
So, what do you need to open an account? The process is actually fairly simple and can usually be done online in just a few minutes. All you need is your business information (EIN, business name, etc.) and a bank that suits your needs. Once you have all of your information gathered, you can easily open a business bank account, and start reaping the benefits.