If you’re a busy small business owner who’s wondering if it’s OK to use your personal checking account for your business, the answer is yes. Probably. At least for a little while.
But you may find there are complications and risks involved if you mix your personal and business funds in one account for very long. It can make record-keeping a challenge, for one thing, especially when it comes to doing taxes. And you may be able to better protect yourself legally if you keep your business and personal funds separate. Let’s take a look at:
• The features of business checking accounts and personal checking accounts
• The differences between these two types of bank accounts
• The risks of using your personal bank account for business
• The advantages of having a separate business bank account
Let’s start learning!
What Is a Business Checking Account?
A business checking account is a separate bank account intended to manage financial transactions related to your business, including making deposits and withdrawals, paying bills, and transferring money. Some expenses you might use your business account for include:
• Office equipment and supplies
• Rent and utilities
• Transportation costs (gas, parking, tolls, or public transportation expenses)
• Car payments and insurance (if you have a car you use for business)
• Consulting and marketing costs
• Paying employees (if you have any)
• Tax payments and insurance premiums
What Is a Personal Checking Account?
A personal checking account is designed for managing an individual or couple’s finances. It can be used for depositing and withdrawing money, paying bills, and transferring money to family members. (Wondering the difference between a personal checking account vs a savings account? The latter usually pays more interest, may have higher minimum deposits, often doesn’t provide checks or a debit card, and in some cases may have transaction limits.)
It may be tempting, especially as a new business owner or sole proprietor, to think, “Can I use my personal account for business?” and proceed to buy a laptop, office supplies, or new business cards with it. But commingling business and personal funds can get confusing. Having to sort things out can make bookkeeping a major headache and cause problems when it’s time to claim business-related tax deductions.
What’s the Difference Between Business and Personal Checking?
There may be some important differences in how a bank sets up its business and personal checking accounts, including:
The documentation required to sign up for a business account may vary a bit from what you’d need for a personal account. For example, depending on how your business is structured, along with an Employer Identification Number (EIN), Social Security number, and photo identification, you may have to provide a business license, LLC agreement, articles of incorporation, or a Doing Business As (DBA) certificate.
Coming up with enough money to open a business account may not be as daunting as you think. The amount it takes to get started varies by bank, but many require only a $25, $50, or $100 deposit to get started. However, banks generally require a higher minimum balance for a business account if you want to avoid maintenance and other fees.
You also may see a transaction fee added to your costs if you go over a maximum number of transactions for the month in a business account. The number of free transactions you’re allowed typically is based on your average monthly balance. If you expect your business to have multiple banking transactions each month, that’s a cost you’d want to consider.
Banks generally offer the same protections and benefits to business accounts as they provide for personal accounts, including round-the-clock fraud monitoring, account alerts, and liability protection for unauthorized transactions. But there may be additional business-specific perks available for business accounts — especially larger accounts. Check with your prospective business bank to find out more.
With a personal account, you’ll likely receive a debit card for your personal use (and one for a joint account holder, if you have one). With certain business accounts, you also may be allowed to get debit cards for your employees so they can make purchases or ATM withdrawals on behalf of the business.
Credit Card Payments
If your business account is a “merchant account,” you may be able to take debit and credit card payments from clients or customers. This requires a different kind of business account, however, rather than a typical business checking account, so inquire at your bank.
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Can I Use My Regular Checking Account for Business if I’m a Sole Proprietor?
If your small business is a sole proprietorship, you can legally operate using only your personal bank account. But you may want to check your account’s terms and conditions to be sure your bank allows you to use a personal account for business transactions. You may have to open a separate account if you’re asking customers to make payments to a company name that’s different from your own.
Can I Use My Personal Checking Account for Business if I Have an LLC or Corporation?
Yes, it may be tempting to use your personal checking account if you operate your business as a limited liability company (LLC) or corporation. But take note: You are legally required to separate your personal and company finances. You could use a separate personal account to establish that split, or you may want to consider the benefits of using a business account instead. (If you’re applying as an LLC or corporation, some banks may require that you use a designated business account.) So in this case, you likely do want to have that separate business account to stay on the right side of the law.
Risks of Using a Personal Checking Account for Business
Using your personal checking account may seem like the easiest way to handle business transactions — especially if your business is small or you’re just starting out. But there are risks involved, including:
One of the factors the IRS uses to distinguish between a hobby and business activities is whether you carry on the activity in a businesslike manner and “maintain complete and accurate books and records.” It’s critical for business owners who claim business income and deductions on their income taxes to keep their company’s financial transactions separate from their personal transactions. It can be much harder to do that — and prove that you’re doing it — if you’re working out of one account. It can be close to impossible to reconstruct what you were paying for and when if you ever have to account for past business spending out of your personal account.
You can form an LLC or corporation in an effort to protect your personal assets from business-related liabilities. But if you mix business and personal funds in one account and a court decides you aren’t actually treating your business as a separate entity, you still may be at risk.
Loss of Credibility
If you’re hoping to grow your business, not having a business-only bank account could hurt your potential. Some clients and investors may be reluctant to make payments to a personal bank account — especially if your business has a different name. It also may be challenging to apply for a small business loan if you haven’t established a professional relationship with your bank. And if you have to show paperwork to set up a client, investor, or lending arrangement, having business-only bank statements could be a lot less confusing (and, um, personal).
Benefits of Using a Business Checking Account for Business
Using a business checking account may not be a legal requirement in all situations, but it could have benefits for you and your business, including:
Unless you’re a meticulous record-keeper, it can be difficult to keep business and personal finances separate. Maintaining separate bank accounts could prevent costly errors, keep you out of trouble with the IRS, and make your life as the company bookkeeper a lot less complicated.
If you use small business bookkeeping software, you may be able to link it with your business bank account to quickly check your cash flow, monitor transactions, build your budget, and create financial projections. That won’t be possible if your business transactions are mixed with your personal transactions, however.
Using a business account for your transactions could help clients, vendors, and others you deal with think of you as a legitimate businessperson instead of someone with a side hustle. (Have you ever heard the expression “dress for the job you want”? It holds true for banking, too. Having a separate business account could help you present yourself as a serious professional.)
Building a Brand
Growing your brand might take more than just your sparkling personality, business savvy, and an irresistible Instagram feed. You may need money, and that means convincing lenders that you’re a good risk. A well-managed separate business bank account can help you build a relationship with your bank and a reputation for creditworthiness.
Using separate accounts for your personal and business finances could make sense — even if you’re a new business or a sole proprietor. It can make record-keeping easier for tax preparation and other business purposes and give your business added credibility with customers, vendors, and lenders. In some cases (LLCs, we’re talking to you!), it’s legally required, so don’t overlook this important step in building your business.
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Can I use a separate personal checking account for my business?
If you use a second personal account to separate your funds, you may lose out on some business-specific tools and perks that are offered exclusively through business accounts. If you are not legally required to have a business account, you might opt for a separate personal account, you may receive other benefits — such as a higher interest rate or lower fees. Either way, you’d be accomplishing the primary goal of dividing your personal and business funds.
Can I transfer money from my personal account to my LLC?
Yes, you can transfer money from your own account to the LLC’s account. It‘s important, though, to keep clear documentation of the transaction.
Do I need a business bank account if I’m self-employed?
It isn’t a legal requirement, but you may want to separate business and personal funds to simplify your record-keeping and keep transactions separate for income-tax preparation and other accounting purposes.
Photo credit: iStock/JNemchinova
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