When business owners start, many use their personal bank accounts to accept and spend money for their company. While maintaining your current banking setup is more convenient at first, merging these two accounts could cause some issues in the long run. There are numerous advantages to opening a business account. It can keep you legally compliant, provide financial protection, and make you appear more professional to customers and vendors. Furthermore, having a dedicated account solely for handling customer payments and vendor expenses makes it easier to document transactions and run your business. Let’s explore the additional benefits of having a separate bank account for your business.
Business Bank Account
A business bank account is an account that is only used for business transactions. A business checking account and a business savings account are both possible. Having a separate business bank account allows you to differentiate between personal and corporate transactions and streamlines your bookkeeping procedures.
Top reasons to open a business bank account for all your business finances
Here are the top reasons why you should open a business bank account for all your business finances:
1. Neat and Accurate Bookkeeping
You want to start your small business as cheaply as possible. That’s great. Before you decide to save money by not opening a business bank account, consider how much time and energy it will take to keep them all together at tax time.
Consider your checkbook. Consider the size of your bank statement if you mixed commercial and personal transactions. Consider how many entries you’ll generate in your first year of business.
If your company expands in the years ahead, the complexity and number of your transactions will inevitably increase. You must be prepared to document and outline all of these transactions in great detail each year during tax season, and combining personal and business funds will make this process considerably more time-consuming.
2. Proof That Your Company Is Not a Hobby
If you run a home-based business, keeping business and personal costs separate is critical. You should deduct your home office space, but you’ll need to know specific office vs. home expenses to calculate your write-off.
The Internal Revenue Service is demanding when establishing your firm as a business, not a hobby. Essentially, you must show a profit on Federal Tax Form Schedule C three out of every five years.
If you have losses that you deduct from your income for three years in a row, the IRS may determine you’re running a “hobby business”.
You may still face an IRS audit even if you meet the “3 out of 5” requirement. If you have a separate business bank account and a well-maintained set of business books, you can further demonstrate that you are a business, not a hobby.
3. Accounting for Separate Entities Must Be Separate
Suppose your company is a separate organization, such as an LLC or a corporation. In that case, the IRS requires you to keep separate accounting and bookkeeping records, which a business bank account makes easier. It makes no difference whether your company is a corporation, a partnership, or an incorporated sole proprietorship. You must have a separate bookkeeping system if you are incorporated. When a company incorporates, it becomes its own legal entity, distinct from the individual (or individuals) who started it.
4. Provides the IRS with a clear audit trail
Although the IRS may never audit you, there is always potential for your firm. When an audit occurs, it’s not that big of a concern as long as you keep good records in separate bank accounts.
You must be certain to save all of your invoices and expense receipts as backup documentation. Combining your personal and corporate finances into the same bank account could make an IRS audit a nightmare.
5. Exhibits Professionalism
To take bank card transactions on your sales, you’ll require a bank (merchant), which implies you’ll need to open a business bank account. If you own a retail store, you’ll also need a business bank account for your POS system.
You want your company to appear professional at all times. Keeping your corporate finances separate from your personal finances indicates your commitment to professionalism and organization. This implies that when you write checks to suppliers, they will see they are from a business, and the IRS will also notice.
Furthermore, if you do not separate business and personal costs, you may be held personally liable for the firm’s acts (not simply financial transactions).
What should someone look for when choosing between different business accounts?
When evaluating various business checking accounts, Consider factors like monthly maintenance fees, the simplicity with which operations (such as check depositing) may be performed, minimums, cash and transaction restrictions, and how quickly the various business accounts interface with applications you already use.
Regarding business bank accounts, not all banks are created equal. Do your homework before determining which bank is ideal for your small business. Consider the following points:
- Fees: Some banks charge a price for everything—a fee for depositing a check, a fee for monthly service, a fee for having a low balance. Before you accept a bank for your business, get a complete list of fees.
- Minimum Balance: Is it necessary to maintain a minimum monthly balance in your bank account? That may be difficult for some businesses, especially at the start. A bank with no minimum balance requirements may be a better alternative.
- Transaction limits: Some banks impose limits that may be difficult for your company to meet. If you make a lot of different cash and check deposits every day, for example, you’ll want to find a bank that doesn’t have a low daily restriction on your business activities. Otherwise, you’ll have to pay transaction costs as well.
- Additional debit cards: If you have employees and want to give them access to your debit card, check with a bank to see what they offer. Look for a bank that allows numerous debit cards on a single account and the flexibility to set limitations on the employee’s debit card so they can’t withdraw or spend more money than you authorize.
- Integration ease: Finding a bank that easily integrates with the accounting and budgeting tools you use might make it much easier to run your business.
Are There Situations Where a Business Bank Account Isn’t Necessary?
Sole proprietors, LLCs, and INCs do not require a separate business bank account. However, having a business bank account will streamline your finances and save time on taxes and bookkeeping, making it worthwhile.
Open a business account today and take your business to the next level!
Opening a business account with Cheqly can help your small business grow and stay up to date. Cheqly revolutionizes how small businesses handle their banking needs by providing an easy and efficient account opening experience. As an entrepreneur, you can enjoy the convenience of comprehensive banking services directly from your device without the concern of monthly or yearly charges. Additionally, Cheqly removes the burden of keeping a minimum balance, and you can effortlessly conduct local and international money transfers.