This article is part of a larger series on Business Banking.
New business owners should understand the importance of separating business and personal finances. While it’s possible to use a personal checking account for business purposes, there are risks associated with commingling your business funds with your personal money. It can make accounting more complicated and can also affect taxes, which may put you at risk of legal liabilities.
Personal vs Business Checking Account
Both personal and business checking accounts typically offer the same basic features and functions, and they are often structured the same way. However, personal checking accounts are intended for personal use only while business checking accounts are designed to manage business finances. A business checking account usually lists the name of the business in addition to the owner’s name. However, a personal checking account only lists the individual’s name.
Business checking accounts can also differ from personal checking accounts when it comes to the documents required to open an account, minimum balance requirements, and fees. Some banks also offer certain functions that are unique to business checking accounts, including business and accounting tools integration, merchant services for processing card payments, debit cards for employees, and payroll processing services.
When You Should Use a Personal Checking Account
A personal checking account allows you to write checks and often comes with a debit card. You should use a personal checking account to manage your personal finances. This can include paying expenses like your personal credit cards, mortgage, and utilities. You can also deposit your paychecks to a personal checking account, make purchases with a connected debit card, or transfer money to a linked personal savings account. A personal checking account also allows you to withdraw cash at an ATM and send personal payments to friends and family.
When You Should Use a Business Checking Account
Business owners should use a business checking account to manage their business banking and finances. This includes paying suppliers, making lease payments, receiving payments from customers, processing payroll, and paying operating expenses and taxes. Banks offer business checking accounts for all types of business structures, including sole proprietorships, limited liability companies (LLCs), partnerships, and corporations. If you intend to use a checking account for business purposes, it’s best to open a business checking account.
How to Open a Business Checking Account
The process of opening a business checking account is usually similar to opening any other type of bank account. Most banks offer a seamless application process, and this usually takes just a few minutes to complete.
While the requirements for opening a business checking account vary from bank to bank, you will usually need to present the following documents:
- Employer identification number (EIN) or a Social Security number for a sole proprietorship
- Business’ formation documents
- Ownership agreements
- Business license
- Personal identification documents
Not sure what documents you’ll need? You can check this free downloadable checklist for the required documents by business structure.
You can either open an account online or go to a local branch to open one in person. Most banks offer both options, except for online-only banks, which don’t have physical branch locations.
Risks of Using a Personal Checking Account for Business
- Mixing of funds: It’s easy to mix your personal money with your business funds if you are using your personal checking account to manage business finances. This can create confusion when you need to account for your business expenses.
- Tax-related liabilities: Using a personal checking account for business can make it difficult to prove separate transactions for tax purposes. This can also result in tax-related legal liabilities later on.
- Unable to conduct banking in your company name: Without a business bank account, it’s difficult to conduct banking transactions under your company name. It’s also difficult for you to apply for business loans because lenders aren’t able to establish your business’ banking background and transactions.
Benefits of Using a Business Checking Account for Business
- Legal protection: Your business is a separate entity and you should treat it as such. Having a separate checking account solely intended for business purposes can help protect your personal funds and assets against business liabilities.
- Separates your personal and business finances: The best way to separate your business and personal finances is to have a separate bank account for each. A business checking account can help keep your business funds and expenses separate from your personal money and financial transactions.
- Tax advantages: Separating your business finances can make accounting much easier, which is an advantage when tax season comes.
- Access to business banking facilities: Most banks offer a variety of perks and features that are exclusive to their business banking clients. When you open a business checking account, you will have access to these services and facilities, including bookkeeping integration, merchant services, payroll processing services, and business advisory services.
- Builds a banking record for your business: A business checking account can help you build a business banking record, which may come in handy when you apply for business financing in the future.
Using a personal checking account for business is possible but not recommended. Business owners should separate their business and personal funds right from the beginning to avoid problems associated with a commingling of finances. Furthermore, business checking accounts offer features that are not available with personal checking accounts. Opening a business checking account can help you keep track of your business transactions and save you plenty of headaches in the long run.