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8 reasons why you need a bank account for your business

When is it time to get a bank account for your side hustle or freelance gig? Why having a separate business bank account is always a good idea, even for small, part-time ventures.

When do you need a bank account for your business?

If you have a small business or side hustle, you most likely have expenses that may be tax-deductible. And if you have tax-deductible expenses, you should have a bank account for your business. It makes accounting easier, projects a professional image, and may provide some protections in the event of a tax audit or lawsuit. Here are 8 benefits to have a separate business bank accounts, and the reasons behind them.

Separating business and personal expenses is just a good idea

When you are just starting out in business, it seems easiest to run business transactions through your personal credit card or checking account (especially if they are few and far between).

Having a separate business account makes it easier to manage your business. You can collect receipts in the account, as well as write checks for expenses. That will be much easier to manage than if you’re attempting to do it all through a personal account.

A business bank account is more professional

When you’re in business, image matters. If you’re writing checks out of a personal account, that won’t help your image. It will make it appear as if you are only sort of in business, or even worse – that you just started the business a few weeks ago. That image doesn’t exactly convey strength, or build confidence with customers and clients.

A dedicated business account, on the other hand, says that you’re open for business. Your business name appears on checks and other payment methods, and gives clients and customers the sense that you’re here to stay.

A separate bank account can protect your personal identity

Since you will be using your business account for a large number of transactions, the potential for some sort of fraudulent activity or identity theft will be higher. If you have a dedicated business account, you can limit the damage to that account alone.

A business bank account will be even more effective if you establish an employer ID number (EIN), which you can easily do with the IRS. You can use that number for your bank account instead of your Social Security number, denying a potential thief access to your entire financial life.

A business banking relationship can be helpful down the road

As your business grows, having a business relationship with your bank will become increasingly important. For example, you may want to set up a dedicated account to handle the payment of income, sales, or payroll taxes. You might also want to establish a relationship for credit purposes. This could include obtaining bank financing to purchase equipment or to expand your business.

You will almost certainly want to have a business credit card, particularly if you have employees or partners for whom you want to provide a card. Developing a specific business banking relationship will make all of that easier to obtain.

A business bank account allows you to accept credit card payments

This might be the single biggest reason why you want a bank account for your business. Since the entire world trades with credit cards, you’ll have to begin accepting them as you expand your business.

You can’t accept credit cards through a personal bank account. It can only happen with a commercial account. Such accounts are set up specifically for the purpose of accepting cards. They can make the credit card process seamless, and that’s exactly what you’ll need.

A business account simplifies tax preparation

Having prepared many, many tax returns in my life, I can tell you that your accountant will love you for this one. And there may be a financial payoff for you as well.

When tax time rolls around, separating out business and personal expenses can be…complicated. If you’re using a tax preparer, that person will not be entirely aware of exactly what represents a business expense and what is personal. That can lead to one of two situations:

  1. Business expenses, and the tax deductions they provide, will be missed.
  2. The preparer will spend additional hours separating out personal expenses, and then call you with questions on those expenses that might not be easy for you to answer.

Both outcomes have the potential to cost you money. The first will be in the form of higher taxes as a result of missing business deductions, and the second from higher fees charged by your preparer for all of the extra time spent doing what is essentially a bookkeeping function.

Having a separate business account will eliminate both problems, and keep more money in your pocket. A business credit card can be helpful for keeping expenses separate, to. This is true if you’re not ready to open your own business bank account. The credit cards that are typically best for freelancers and contractors don’t charge annual fees and offer enticing sign-up bonuses. You may find that a dedicated credit card can be a good intermediary step until you’re ready to set up a business bank account.

A business account is necessary to form a partnership or incorporate

When you enter into a partnership, at least one other person will be handling financial transactions for your business. You’ll need a business bank account for that to be possible, since it can’t be done with a personal account. (Nor would you want to give a partner access to your personal account in the first place!)

The situation is similar if you incorporate your business. Not only may you have others needing the ability to access the business bank account, but there are also legal ramifications for sharing access to an account.

Since a corporation is viewed as a separate legal entity from its owners, it must have its own bank account. Any transactions that you run through your personal account for the business will technically be a separate activity. That will have to be accounted for at the end of the reporting period, or when you go to file your business and personal tax returns.

A business bank account makes it easier to sell your business

There are a few reasons why you will want to have a bank account for your business in connection with the potential sale of the business.

The first is that the business should have a bank account that is specifically tied to it, and once again especially if it is a partnership or corporation. When the business is sold, the bank account will transfer to the new owners with the sale.

But apart from the sales transaction itself, there’s also the matter of documenting the performance of the business for the purpose of selling.

Anyone buying your business will want to see a history of its financial transactions. They will, of course, inspect your financial statements, but that’s only a starting point. They’ll almost certainly want to go deeper. That means that they’ll take a close look at the supporting documents that produce the numbers that are showing in your financials.

That will include a close review of bank statements for the past several years. That’s because bank statements are issued by the bank, and represent a form of third-party verification of hard numbers.

The sale of a business usually triggers an investigation process that’s very similar to an audit. In that situation, the more documentation that you can provide, the better. You certainly don’t want prospective buyers looking at two or three years’ worth of personal bank statements. A business bank account can enable you to release the bank statements to a prospective buyer, without having to concern yourself with disclosing personal information.

Having a business bank account makes sense for a variety of reasons. It’s simply safer, and more efficient to use a business account for your expenses than to go through your own personal account.

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