Updated October 26, 2020
When you’re running a business, you have the option of using a personal checking account for your transactions or opening a business checking account. What’s the difference between the two? Why should you use a business checking account, anyway?
Whether you’re opening your first business or your fifth, having a business checking account is more important than you might think. Here are five important benefits of opening a business checking account.
1. Separating Business and Personal Finances
Perhaps the most important reason to use a business checking account for your business transactions is to separate your business and personal finances. Why? Because when it comes to tracking income, expenses and paying taxes, it’s just easier if things are separated.
Separating your personal finances from those of your company will help you avoid tax problems with the IRS. It is critical to have company expenses distinguished from personal items — especially if your company is ever audited someday. A business bank account helps prove that your business is a real entity and not a hobby.
Your business will likely have its own taxes to pay, and you’ll have to pay personal income tax. If you’re using one checking account for both business and personal finance, you’re going to have a confusing, jumbled mess. You should be tracking your business income and also how much you’re paying yourself from the business. All of this will come into play when you file taxes.
Not to mention, if there’s a problem with your business checking account, it could potentially derail your entire financial network. What if your account becomes inaccessible or is jeopardized by a security breach? You’d be unable to access any of your money for who knows how long. The bottom line? Separating business and personal finance isn’t just a matter of organization—it’s also a matter of personal and business security.
2. The Need To Acquire Financing
At some point during your business ventures, you may want to acquire financing to expand your business or make purchases to improve operations. In this case, it’s best to have a business checking account for two reasons: to separate personal and business credit scores, and to prove the seriousness of a business. Banks will look at more than just the business’s income. Lenders want to see that a business has its own accounts, stable income, and a good credit score. If you’re mingling business and personal funds, you’re putting your business at the mercy of your personal credit score.
If you have financial problems like collections or just a poor credit score, you might be putting your business’s financial future at risk. Not to mention, certain resources, like small business loans, may only be accessible to businesses with their own checking accounts. Don’t risk your business’s ability to get the funding it needs by mixing personal and business finances.
A big part of owning a business is playing the part. If you want to call yourself a business owner, you’ll want to look and act the part. Imagine sending a personal check to a customer or client. That doesn’t look very professional, does it? You can say you’re a business owner all day long, but in order to reinforce the claim, you need to have certain things to back it up. A business checking account is a good place to start.
You can order checks with the business’s name (and logo) on them. You’ll be able to prove to anyone who inquires that you do, in fact, own a business. Clients and potential customers will feel more comfortable doing business with someone who feels more legitimate. A personal check just doesn’t look professional.
4. Accepting Credit Cards
With a business bank account, you’ll be able to accept credit card payments for your business. This is crucial to the success of your business, as credit cards are a leading method of payment in the US. If you can’t accept card payments, you may be cutting your business short. Using a business checking account allows you to accept payments via your bank; or, you can set up a merchant account and accept payments that way.
This is also important if you have an eCommerce store. Even if you use a service like Square to process payments, you’ll need an account to send them to. You don’t want to send them to your personal account! Using a business account helps you track each and every payment and refund without the confusion of your shopping trip to Target intermingled with it.
5. Business Partners
When you start a business, sometimes you’re not alone. If you have business partners, they’ll want to be able to access and use business funds, too. That can hardly be accomplished if your business finances are tied to your personal accounts! Would you want even a good friend to have access to your personal checking account? Probably not.
You can also give certain administrative bank duties to future employees, which is something you definitely wouldn’t want to trust to someone if you’re using a personal account.
That’s not to say that you can’t trust the people you’re opening a business with, but it’s always a good idea to take certain precautions. Things can go wrong in business, and the last thing you want is for your personal finances to be at risk should something go awry. The best practice? Separate business and personal finance and only give business partners or employees access to the business account(s).
The Bottom Line
There’s nothing more important than protecting both business and personal finances when you’re a business owner. Keeping things separate for tax purposes, payroll, and more will protect your business interests and keep your personal accounts out of the mix. There’s more risk involved with personal accounts, so open a business account today and take your business to the next level of professionalism.