If you own a business, it’s important to have a separate bank account just for your business. This helps you avoid mixing your personal money with your business money.
When you mix your personal and business funds, it can create issues, especially if you have problems with the IRS. Many people who own their businesses combine their personal and business bank accounts. But what’s the distinction between a business bank account and a personal bank account? Which one should you pick?
In this article, we’ll explore the main differences between business and personal bank accounts. This will help you understand their advantages and decide which one is best for your business.
Differences of a Personal Bank Account and a Business Account
A business bank account is a special bank account just for businesses. It assists businesses in monitoring their finances. If you own a small business, you might want one to keep your business money separate from your own.
People use these accounts only for business things, like buying stuff for work. They don’t mix this money with their personal money. You can have a checking account and a savings account for your business in a bank.
Checking Accounts
Business checking accounts and personal checking accounts are quite alike. Both are used for regular banking activities. Just like with a personal account, a business account lets you take out money, write checks, and pay using a debit card or Automated Clearing House (ACH) payments.
The main difference is that a business checking account is specifically for work-related transactions. This is important because it helps you keep all your work expenses in one place, making it easier to track them on a bank statement.
Having a separate business account makes it simple to keep an eye on what you spend and earn. It’s completely separate from your personal funds.
Another important difference is the fees. Personal checking accounts are usually free to open, and you can often avoid fees based on factors like your minimum balance or direct deposits.
But business accounts usually have higher fees. Meeting the requirements to avoid these fees is generally more challenging than with personal accounts.
Savings Accounts
Just like your own savings account, a business savings account is for putting money aside.
Both personal and business savings accounts let you keep your money safe and even earn extra money from it through interest. The more money you save and the higher the interest rate, the more your money will grow.
They can also both help if you spend too much money. If you accidentally spend more than you have in your business checking account, the savings account can cover it. This saves you from extra fees for overspending.
Monthly Maintenance Fee
Business checking accounts often have higher fees compared to personal checking accounts. The amount you pay each month depends on the bank or credit union you choose, but there are ways to avoid these fees.
When you open a business bank account, ask the bank how you can avoid paying fees. Some common ways include keeping a certain amount of money in your account every day, making regular transactions with your business debit card, or having direct deposits into your account.
Some banks might even offer free accounts for small businesses, but the rules for these accounts can be stricter. It’s important to check with your bank or credit union about their specific guidelines before you open a business checking account.
Business Bank Account vs. Personal Bank Account: Which One is Better?
Usually, it’s a good idea to have a separate bank account for your business. The IRS suggests opening one just for your organization. This special account not only offers tax advantages but also other perks we’ll talk about later.
Can a Personal Account be used as a Business Account?
If your business is just you, and you’re not a separate company, you can use your own bank account for your business. You don’t have to open a special business account. It’s your choice, not a rule.
But if your business is a proper company, like a corporation or an LLC, you can’t use your personal bank account. The government says you have to have a separate business account. This is because these types of companies are seen as different from you legally. They are separate entities. So, you must keep the business money separate from your personal money.
You can open this business account at the same bank where you have your personal account. But it has to be in the name of the company, not your own name. And you can only use that money for business-related things. Mixing it with your personal money isn’t allowed.
Importance of Having a Business Bank Account
If the law doesn’t make you open a business bank account, why might you still want to? Well, having a business account offers many advantages compared to a personal one.
Separating Your Money for Taxes
To keep track of your business money and personal money, get a separate bank account for your business. This way, all your business transactions are in one place. It helps you see how much money your business is making clearly. When tax time comes, you won’t have trouble figuring out which expenses are for your work. Having a separate account makes it easy to show these expenses to the IRS when you file your taxes. So, it’s a good plan to open a special account just for your business, keeping your personal money separate.
Professionalism
Having a business checking account makes your company look more professional. When your business has its own bank account, it gives customers confidence. They feel comfortable making payments to a real company, not just an individual. When you write checks or receive payments, your business name is what people see.
Managing Your Liability
Setting up a separate business account is crucial. It limits your liability and protects your personal finances. If you’re a corporation or LLC, it’s mandatory to keep personal and business funds separate. Even as a sole proprietor, having a separate business account offers protection.
Operating a business involves risks like fraud and theft. If someone gains access to your account, they can reach your personal funds and assets. But if you keep your business account separate, your money is safeguarded. In case of a breach, thieves can only access your business funds, not your personal savings.
Moreover, even if someone hacks into your business account, your money is insured by the FDIC, ensuring you’re covered in any unfortunate situation.
Building Business Credit
Separate accounts offer a crucial advantage: they enable your company to establish its own credit history, independent of your personal finances. This separation means your business and you will have distinct credit scores. This separation allows your company to access various opportunities. As your business builds credit, it becomes eligible for business credit cards and small business loans. These financial tools can cover extra costs needed for your business’s growth, like acquiring new equipment.
Having a dedicated business credit card lets you manage necessary expenses while safeguarding your personal credit score. This is because the money spent on your business card doesn’t impact your personal credit utilization ratio, a factor that creditors consider when evaluating your creditworthiness.
Moreover, a significant business loan can help you secure property for your organization, providing a physical location for your operations. Typically, these loans are much larger than personal loans you might secure through your personal bank account.
Allowing Business Partners Access
Opening a business checking account has a significant advantage: you can add your business partners as authorized signers. Unlike personal accounts, where it might be uncomfortable to add associates, in a business account, partners need access to manage finances for work. This separation keeps personal and business funds independent and is a wise choice.
Conclusion
Maintaining a distinct bank account for your business is essential for a variety of important reasons. Mixing personal and business funds can lead to complications, especially with tax matters. By maintaining a distinct business account, you can easily track your business transactions and expenses, facilitating smooth tax filings. Additionally, a business account enhances your company’s professionalism, instills customer confidence, and helps manage liability by safeguarding personal finances. It also allows your business to establish its credit history, enabling access to essential financial tools like business credit cards and loans. Therefore, keeping personal and business funds separate not only simplifies financial management but also protects your business and personal assets, fostering long-term success and growth.
