If you own a small business, whether it’s online or offline, the most important foundation you can have for your finances is a business bank account.
Managing your transactions with a business bank account, as opposed to a personal checking or savings bank account, gives you the opportunity to legitimize and professionalize your business. And it keeps your personal transactions separate from business transactions — something that makes both the IRS and your bookkeeper happy.
Today, you have plenty of online options for opening a low-fee or no-fee business bank account. But that’s not the only reason you should get one. Here are a few more reasons small business owners should have a business bank account.
Keep Things Organized
Having a bank account where only business transactions happen makes tracking your profit and losses easier. It allows you to see problems quicker and helps you make profit adjustments earlier rather than later.
If you were using one account with both personal and business expenses in it, imagine the headache of trying to sift through weeks’ or months’ worth of purchases to find out whether or not you made a profit last quarter.
Also consider this: Keeping all your business transactions separate from your personal purchases makes weekly and monthly reconciliation easier. And this creates fewer headaches during quarterly and yearly tax preparation.
You’ll also be able to see all business-related fees, memberships and subscriptions in one place. Not so simple if you have personal expenses, club memberships and magazine subscriptions all together.
Remember, business fees and memberships/subscriptions qualify as tax-deductible business expenses. But of course you’ll have to be able to prove it through proper and organized record keeping.
Having a business bank account allows you to accept more types of payments from clients. Especially if you do business online and/or have international clients.
Accept credit cards and payments via PayPal, Stripe and TransferWise. You can also sign up for merchant account ACH bank-to-bank transfers. This is something you can’t do with a personal checking or savings account.
Something to note: Apps like FreshBooks and 17Hats won’t allow you to accept payments from these third-party payment processors unless you link a bank account to your FreshBooks or 17Hats account.
A business account allows for future business structure expansion. You may decide to grow your business and add a partner. Or you may take on employees. Or move from a sole proprietorship to a different structure. If so, you’ll need to have a business bank account.
A business account lets you give other people access to the account. For example, a partner, an accountant or bookkeeper, or an employee.
Having a separate business bank account allows you to stay accountable to other aspects of your business. For instance:
- Give an accountant or bookkeeper access to help you manage and double check your business finances. (This means you don’t have to give them access to your personal transactions.)
- Know what’s going on with your business financials each quarter. See how the business is doing overall, so you can adjust for future growth.
- Manage your business budget each month.
- Know what’s going on with your business, where the money is coming from and where it is going.
- Keep track of all sources of income, expenses, merchants and clients. This makes tax time more manageable for you and your accountant.
A business bank account will give you the professional credibility that a personal bank account can’t. It doesn’t matter what type of business you run, whether it’s an LLC (limited liability company), incorporated company, sole proprietorship or a side hustle.
As a business owner, you’ll not only be taking payments, you’ll be making payments as well. Create an account with your professional business name. Any checks you write will have your business name on it. Your personal account allows only your own name on checks.
What looks better on a check or invoice to a client or merchant? Your name or your legal business name?
A business account legitimizes your company and gives you professional credibility when it comes to writing checks, accepting payments and sending invoices, because the account is in your legal business name.
When It Comes to the IRS
The IRS guidelines for small businesses state that owners may keep any records necessary that best suit their business. They just need to clearly show any income and expenses. The best way to do that is to make sure your personal transactions are kept as far away from your business transactions as possible. You’ll thank yourself if there’s ever an audit.
For some small businesses just starting out (and for some side-hustle businesses), there is the question of whether it’s considered a hobby or business. If you are keeping things organized with a business account and can prove you are making a profit, you shouldn’t have a problem according to the IRS publication.
No matter what kind of small business owner you are, having a business bank account lays the foundation for you to better manage your organization for growth and profit.
There are plenty of options to open an account online or with a local bank. So, there are no excuse for anyone to be mixing personal and business financial transactions.
Are you using a business bank account? Let us know about it in the comments section below.