A small business can start with nothing but a great idea — but as that idea begins to coalesce into an actual operation, there are some key structural elements you’ll want to put in place. One thing you’re likely to need is a business bank account. The many advantages of a business bank account include simplifying bookkeeping and tax preparation, establishing credibility, accepting customer payments, and more.
Key Points
• Having a separate business bank account is crucial for legal and tax purposes; it also contributes to a company’s professional image.
• The separation of personal and business transactions simplifies business tax return preparation.
• Business bank accounts help track business-only expenses, making it easier to identify potential tax write-offs.
• Opening a business bank account and obtaining company credit cards can help build business credit and may ease access to future loans.
• Merchant services accounts support card transactions and provide customers with purchase protection.
What Is a Business Bank Account?
For convenience’s sake, it might be tempting to consider using a personal bank account vs. a business account for your new company. But convenience isn’t the whole story. It’s crucial for your new venture to have a business bank account before you start spending or accepting money.
A business bank account is used to manage financial transactions, such as receiving payments from customers, paying vendors, and paying employees. Commonly, business accounts include a business checking or savings account, a credit card account, and a merchant services account that enables you to accept credit and debit card transactions.
Key Benefits of a Business Bank Account
There are several solid reasons to open a business bank account. First, it helps you keep personal and business finances apart, which is important for legal and tax purposes. For example, separate accounts make it easier to track which expenses are business-only and thus could be possible tax write-offs.
A business bank account can also contribute to a professional image for your company. Customers pay the business directly rather than you, lending authority to your transactions.
Merchant services accounts support card transactions and offer customers purchase protection. This also helps ensure customer credit card information is safe.
What’s more, opening a business bank account along with company credit cards can help your business build credit and improve its access to future loans. Lenders will look for a strong credit history, including a track record of paying bills on time, when determining your creditworthiness.
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Legal and Tax Benefits of a Business Checking Account
A business bank account can help you streamline your finances. You can easily view your account balances, income, recent payments, and perhaps the details of your business line of credit or other loans.
Keeping personal transactions clearly separate from business transactions will be useful later, when you’re preparing your business tax return. Personal expenses generally aren’t deductible as business expenses. Improper business deductions on your tax return might lead the IRS to charge you penalties and interest. In the worst case, IRS suspicions of fraud could turn into criminal charges.
A business bank account can also be a tool for shielding business owners’ personal assets. LLCs and corporations legally separate the business from the owner, so that in case of loss or legal damages, creditors can go after company assets only. Having a business bank account makes it clear which money belongs to the company.
Financial Management Advantages of a Business Bank Account
Many business bank accounts come with features that can help make financial management easier. For instance, as noted earlier, they may be linked to business credit cards that can help you make purchases and grow your business.
Other business checking account benefits might include invoicing tools and accounting software. You may have the ability to upload receipts and categorize spending. And you may be able to work with a dedicated account manager at your bank who provides a single point of contact, supporting your needs and advocating for you as necessary. (This relationship could also come in handy if or when you go shopping for a small business loan.)
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Types of Business Accounts
Common types of business bank accounts include:
• Checking accounts: A deposit account that allows easy access to your money; critical for making and receiving payments. A business checking account allows for writing checks and the use of debit cards.
• Savings accounts: A deposit account that typically earns interest, allowing you to set aside money for future goals or for an emergency fund.
• Merchant accounts: A specialized account that allows you to accept credit and debit card payments. The account acts as an intermediary that holds funds from customer transactions before depositing them into your main account. (Many businesses use payment processors in lieu of merchant accounts. The processing system would send your payment to your business account.)
• Credit accounts: Credit card and business lines of credit are forms of revolving credit. Credit cards allow you to borrow up to a certain limit. Ideally you’d pay back what you owe each month, but if not, you can carry a balance month to month. If you do carry a balance, you will owe interest on the debt. Similarly, lines of credit allow you to borrow up to a given limit. You’ll owe interest on the amount you borrow, and when you repay the debt, the money is available for you to borrow again.
How to Choose the Right Business Bank Account
Rates, fees, and features will vary from bank to bank. Shop around to find business account packages with the lowest fees and the right benefits for your situation. Some aspects to look at include interest rates on checking and savings accounts, as well as interest rates on credit cards and lines of credit. Take a look at transaction fees, early termination fees, and minimum account balance fees.
A merchant account may be an important feature, especially if you choose not to use a separate payment processor. When considering a merchant account, look closely at the per-transaction fee (the amount charged for processing every credit card swipe) and the monthly fee.
The Takeaway
Opening a business bank account is a crucial move for small businesses. Separating business banking from personal banking typically helps with financial management, simplifies tax preparation, and makes it easier for companies to build credit. For certain business structures, having separate business accounts can also help shield personal assets from legal damages.
If you’re seeking a checking account for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare checking account options for your business in minutes.
FAQ
Do I need a business bank account as a sole proprietor?
As a sole proprietor you are not legally required to have a business bank account. You could use a personal account for business purposes, but it’s not necessarily a good idea. Having a separate business account will help you sort out business and personal expenses and income, making it easier to produce financial statements and tax returns.
Can I use my personal bank account for business expenses?
Legally, you can use a personal bank account for your business only if you are a sole proprietor or a single-owner LLC. Otherwise, you must have a business bank account. Generally it is to your advantage to have at least one business account for any company you run, regardless of structure.
Does opening a business account help build business credit?
Opening a business account can help your company build credit, as it clearly indicates that your business is separate from you as an individual. Any loans or lines of credit for the enterprise can run through your business account. Paying those bills on time while minimizing debt should improve the company’s credit score, and a high credit score can help you access loans at lower rates.
What documents are required to open a business bank account?
To open a business bank account, you’ll need to have an employer identification number, or EIN, from the federal government (sole proprietors can simply use a Social Security number). You’ll be expected to produce ownership agreements and documents related to your business formation. You may also be required to show a business license.
Can I have multiple business bank accounts?
There’s no limit to the number of business accounts that you can have. Managing multiple accounts can be complex, but there may be tradeoffs that make it worthwhile. For example, you may be able to track certain kinds of transactions better by setting up designated accounts, such as separate accounts for payroll and incoming client payments.
Photo credit: iStock/Djordje Krstic
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