The first time you sold a graphic design on Upwork or edited someone’s video ad on Fiverr, you probably didn’t rush out to open a business bank account.
But if you’re serious about launching a business, even a solopreneur business or side gig, you will quickly reach a point where you need a business bank account.
This, in turn, means you need to choose a business structure and create a legal entity. When in doubt, speak with an attorney, but the simplest way to start is with a limited liability company (LLC). This can be done pretty quickly with Rocket Lawyer. You can always change legal entities later if you need a more robust business structure.
Reasons Why You Need A Bank Account for Your Business
Why jump through these hoops and open a business bank account? Because that hour or two of work now can save you countless hours, headaches, and costs in the future.
Before dismissing a business bank account as unnecessary for your small enterprise, consider the following reasons to take your banking more seriously.
1. Legitimacy
The most basic reason to open a business bank account is simply to be taken seriously.
Imagine you approach a potential vendor, supplier, or partner. You pitch them on why they should work with you. Eventually, you win them over and they ask for a deposit — which you hand over in the form of a personal check.
At best, they’ll raise an eyebrow and wonder why you don’t have a business account. At worst, they could wonder whether you’re a legitimate business and second-guess working with you.
Or, imagine you need to refund a dissatisfied customer. Would you write them a personal check or send money from your personal account?
It looks unprofessional — dodgy even — to use your personal checking account to pay business expenses this way. A business checking account sends a message that you’re legitimate and here to stay.
Pro tip: One of our favorite business bank accounts is the Bluevine Business Checking account. There are no monthly fees and you’ll earn a 1% interest rate on your account.
2. Privacy & Identity Protection
Businesses make far more financial transactions than individuals. They often do business with people and companies all over the world. That means more opportunities for criminals to target you and your account with scams, identity theft, fraud, and other illicit strategies for moving money from your account to theirs.
By using a business bank account, you isolate these risks to your business account and segregate your personal financial portfolio in its own silo. You can use an employer identification number (EIN) for identification rather than your Social Security number (SSN). The less you release your SSN and other personal information, the less opportunity for identity thieves to get a hold of it.
Scammers aside, privacy has its own inherent value. You can use business entities and accounts to help shield you from every Tom, Dick, and Harry knowing who you are. As a real estate investor and landlord, I learned that lesson all too well when tenants started showing up at my front door at 9pm.
3. Accounting & Tax Reasons
By separating your personal and business expenses in different accounts, you keep your books much cleaner. Clean books help save you time and money in multiple ways.
First, it makes it easier to prepare your tax return. Whether you prepare your own taxes using free online tax software from H&R Block or hire an accountant to prepare your return for you, you need to report business income and expenses separately from your personal income and deductions.
Keeping them separate from the beginning saves you time if you prepare taxes yourself, and saves money on your accounting bill if you pay someone to prepare your tax return for you.
When you commingle funds in your personal account, it becomes far too easy to overlook deductible business expenses. A separate business bank account ensures you don’t miss any valuable deductions.
It also helps you avoid the opposite mistake: deducting personal expenses illegally as business expenses. This mistake can trigger an IRS audit and subsequently make your life miserable.
A tax audit is even more miserable if your personal and business expenses are all tangled up in one personal bank account. Clean books make an audit far easier to defend.
Even people who simply work a side gig should consider doing so under a business name with a separate business bank account. It may seem unnecessarily complicated in the beginning, but it saves you time and money later.
4. Liability
As their name implies, limited liability companies exist primarily to limit the owners’ liability to only business-owned assets.
For example, say you personally own $200,000 in stocks and have another $250,000 in equity in your home. Your business owns $50,000 in assets. If someone sues your business and wins, they can theoretically only collect money from the business — they can’t touch your personal assets.
This protection breaks down if you commingle your personal assets with your business assets. Then, everything becomes fair game for plaintiffs and creditors.
In other words, legal entities only limit your liability to the extent that you keep your funds and accounting separate.
It works like this: The plaintiff sues your company and names you personally as a defendant in the lawsuit as well. It’s known as “piercing the corporate veil” — coming after not just your business and its assets, but you and all your personal assets too.
You and your attorney must then petition the judge to remove your personal name as a defendant in the suit, and the judge can demand evidence that you truly manage your business separately.
That evidence should include separate business and personal bank accounts.
5. Merchant Services
Do you want to collect money from your customers via credit cards or bank transfers?
Then you need a business bank account. When you apply for a merchant services account so you can collect money through a payment gateway, one of the first things they ask for is your business bank account information. You can’t run business charges through a personal checking account.
The world of merchant services and payment gateways is a complex one, so do your homework about what to look for in a payment processing service before committing to any one option.
6. Partnerships
Just because you’re a solopreneur today doesn’t mean you’ll never have a business partner or two. If and when you do, you’ll need a neutral, joint bank account specifically for business transactions.
After all, a business partner can’t write checks or make withdrawals from your personal account.
Besides, the sentence “I use my personal bank account to run my business” serves as the business equivalent of telling a date “I live in my parents’ basement.”
You and your business partners need access to a proper business bank account to conduct all manner of normal transactions.
7. Business Banking Relationships
Your personal relationship with your bank is probably one of a simple service provider. They hold your money and give you a debit card to access it, end of story.
But businesses rely far more heavily on their banks for a more nuanced relationship and even partnership. Beyond simply providing you with a business checking account, they may also provide rotating lines of credit, business loans, business credit cards, and other credit services you may need to grow your business.
Nor does your business banking relationship end with them extending your loans and credit. They can often help you with things like payroll processing, tax-related services, and escrow accounts. As businesses grow, they typically need to create multiple business bank accounts for different departments or areas of their business.
That business banking relationship starts with opening a simple business checking account.
8. Build Business Credit
First and foremost, understand that a business bank account does not directly establish credit for your business. But it does open the door for you to do so.
You can’t open a business credit line or loan without a business bank account. Opening an account meets one of many preliminary criteria to qualify for a business credit account. Lenders will ask to see bank statements, and they like to see an established business banking history — the longer, the better.
Your business banking partner can also serve as an early reference for your business. Even if you don’t use them directly for a loan or credit line, they may still help you secure credit elsewhere with a reference letter.
9. Enable the Sale of Your Company
Even if you have no intention of selling your business right now, most entrepreneurs don’t continue working in their business until the day they die. Sooner or later, you’ll probably want to sell your business, even if it seems too small to sell right now.
Buyers need to evaluate a company’s financials in order to make an offer. Handing them your personal bank statements marked up to distinguish business from personal transactions doesn’t exactly instill confidence in a prospective buyer. Nor does it provide much clarity on your business’s financial health.
Keeping completely separate financial accounts draws a clear dividing line between your personal and your company’s assets and income. Besides, do you really want potential buyers picking through three years’ worth of your personal bank statements?
Make the switch now, long before you actually want to entertain sales offers, to lay the groundwork to sell your business in the future.
Final Word
No matter how large or small your business, you need a business bank account.
Fortunately, in today’s world, you have plenty of options, whether you’re looking for free business checking or more complex business accounts with all the bells and whistles. Review your banking options carefully before committing, and start positioning your business today for tomorrow’s growth.
