Does Your Small Business Need a Separate Bank Account?

Estimated read time: 5 minutes

Perhaps you are in the process of starting your own business or have been for a while now. As far as banking goes, you want to keep it simple. Afterall, you are doing this all on your own and don't need to add extra layers to complicate things. However, when it comes to your personal and business bank account, you need to keep them separate.

Keeping your financial records straight when you have a business will be a whole lot easier in the long run if you keep it separate from your personal accounts. When you want to be smart about business finances, that is really the first step to ensuring you're on the right track. Here are the five main reasons that you will want to have a separate business bank account.

Business Banking Fees are Deductible

While bank fees are considered a deductible business expense, you still don't want to get stuck paying more than you have. As you shop around for a business bank account, take special notice of the fees that are part of the account.

These fees actually vary quite a bit between different financial institutions. Fees that are likely to be variable are the account balance minimums and the number of monthly transactions. Try to come up with a good estimate or consider your previous history if you have been running a business for a while to compare each bank's fees with your situation.

If there are certain services, such as branch banking, that you will not need for your business, that can also affect the price you pay for your account.

A Business Bank Account Offers Credibility

Both your customers and potential creditors will feel a lot more comfortable dealing with your business when you have a business bank account. This is particularly important when you're starting your business.

When you have customers pay for goods or services from your business, it will be more professional for them to write out the check to your business instead of directly to you. In order for your customers to write out checks in your business' name or for you to pay business expenses with a business credit card, you need to establish a business bank account.

Having a Business Account is Huge for Tax Reasons

At tax time, you're going to breathe a whole lot easier when you keep your business account separate. We've all heard about people who have been audited by the IRS and ended up having to pay additional fees and charges due to costly mistakes.

Even if you are keeping track of all of your receipts and recording your business transactions, you will still have to deal with more questions if you get audited. Even if you are the most organized person in the world, we all misplace or forget things that come back to haunt us later.

A bank account designated to your business will ensure your paper trail is much easier to track and there's a solid record of all your business financial transactions.

Whether you have a sole proprietorship or incorporated business, it's recommended to have a separate account. This is particularly important in the case that you have a corporation. Since a corporation is considered a separate entity from your personal assets, you gain protection from additional liability.

Both your customers and potential creditors will feel a lot more comfortable dealing with your business when you have a business bank account. This is particularly important when you're starting your business.

There have been cases where courts have disregarded the notion of a "separate entity," such as when the charge against a business has been gross negligence by directors/owners. In such cases, courts have held the directors/owners personally liable for the company's misdeeds. One of the factors the courts will consider in these cases is the level of separation there is between the financial activities of the business and it's owners.

Legality

Depending on the structure of your business, you might be legally obligated to have separate business and personal accounts. When your company is a separate legal entity, the funding for your business needs to be in a separate account.

If you operate your business as a "Doing Business As", also known as a DBA, your bank account needs to reflect that business in the name. A DBA means you are registering your business name under a different name from your own.

In most cases a sole proprietorship and partnership will need to file for a DBA. With these business structures, your name is part of the legal name of the company itself. If your name is Tom and you are starting a home improvement store, then your DBA could be called "Tom's Home Improvement". You're not legally required to have a business bank account in these types of structures.

If you are operating a limited liability company, better known as an LLC or a corporation, you will be required to run it as a separate entity from your personal account.

It Helps Keep your Records Clean

When you are mixing your personal and business transactions, it can create an enormous task come tax time. You're not going to want to face that headache and will not want to pay the extra costs of having an accountant do it for you.

Keeping your business account separate will keep your records clean and prevent mistakes that could get you audited. You will of course want to save and keep your invoices and receipts in a safe place to ensure you have them to match up with your bank statements.

A Key to Success

If you want your business to be successful, take the time to look for a business bank account. It will start you off on the right foot and establish a professional appearance for your business. As your business' financial needs change or grow and you need to consider a line of credit, loan, or other service, you will gain more credibility when you have established a business bank account.

The extra steps you take to start a business account will definitely make you glad you did in the long run. You can then focus more of your attention on building your business and making it a success.