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Learn more about business bank accounts – including the best time to open one and how to get started.
A business bank account can be a gamechanger for your business finances. Opening a bank account for your business is a simple, inexpensive way to streamline and track your business transactions.
The benefits of opening a business bank account
While it might seem easier to keep using your personal bank account for your business transactions, there are plenty of good reasons to open an account that’s used exclusively for your business.
Keep better bookkeeping records
When tax time arrives, you’ll be required to report your business income and file a return. If all of your transactions (both business and personal) are being made from one bank account, it can be difficult to sort through transactions to calculate your total business income and expenses. You might end up misreporting your business activities to the government, which can result in major consequences.
It takes time to build a business and many entrepreneurs claim a loss during the first few years on their income tax return. However, the government may disallow these tax losses if they believe you are pursuing a hobby instead of a business.
The (IRS) audits thousands of small businesses every year. Having your personal and business transactions all in one bank account may cause an auditor to challenge your business deductions and possibly disallow items, which may incur additional tax payments and penalties.
Look more professional
Asking a client to make a check out to your personal name – or sending payments to suppliers from your personal account – may not project the most professional business image. Conducting transactions through your business bank account can appear more legitimate and professional.
Assess business performance easily
It’s a lot easier to sort out deposits and expenses, track cash flow, and analyze how your business is performing when all of your business transactions are in a separate bank account. Having a deeper understanding of your business finances can help you make clear and informed business decisions and is critical to your success.
“Keeping your cash in separate accounts makes it clear which funds are business and which are personal.”
Establish a credit profile for your business
As a business owner, you may eventually want to apply for a line of credit, loan or credit card for your business. When applying for business credit, a bank will want to review your business credit history. Having a separate bank account helps build a credit profile for your company and can make it easier to obtain funding for your business down the road.
Become disciplined with your spending habits
Keeping your business funds separate from your personal cash makes it less likely you’ll dip into business funds to pay for the occasional personal expense. To pay yourself, all you need to do is write a check or make a transfer from your business account and record it in your accounting records as a draw or salary.
When to open a business bank account
The best time to open a new business checking account is before you open for business. That way, all transactions can flow from your account, and your accounting software will capture all your early transactions.
Or you may decide to open a business account during other milestones, such as:
- You’re turning a part-time gig into a full-time business.
- You’re taking on a new business partner, so it’s best to set up a new business account reflecting the new name and business structure. Same thing applies if there’s a change in your business structure to a corporation, limited-liability company or limited-liability partnership.
- Your business is starting to grow quickly. Maybe your sales are increasing significantly, you’ve landed a major new client, or you’ve hired new employees. The larger your business grows, the more complicated your finances will become — all the more reason to open a business account.