Why Get a Business Checking Account?
Published: July 12, 2024
Whether you’re a freelancer, self-employed or own a small business, you should probably have a business checking account. These are special bank accounts designed with businesses in mind, offering services targeted at business owners rather than individuals.
It can be tempting just to use your personal checking account for your company, especially if you’re just starting out, but it’s best to open a dedicated business account.
Here are the top four reasons to open a business checking account and some basic tips on what you need to make it happen.
Reasons to Open a Business Checking Account
In many ways, a business bank account is like a personal bank account. Both types of accounts allow you to deposit and withdraw money, write checks, and access your funds online or through ATMs. While keeping everything in one place may seem easier, keeping your business funds in a separate account designed and designated for business has numerous advantages.
1. Tax Simplification
The IRS recommends that all small business owners have separate bank accounts. While a sole proprietor—an individual who owns a business and is personally responsible for its debts—is not legally required to use a business checking account, it’s still a good idea from a tax perspective.
In particular, a business checking account simplifies the process of paying quarterly estimated taxes. Since your small business income is not subject to withholding, you are on the hook to pay estimated taxes quarterly. Calculating your business income and expenses will be a quarterly headache if you run your business through your personal checking account.
What’s more, the IRS requires sole proprietors to identify their business and personal transactions within their personal checking accounts so they can accurately file their taxes. And don’t forget: An audit of your business could expose your personal transactions to scrutiny if you mingle personal and business transactions within your consumer checking account.
2. Professionalism and Credibility
Many small side businesses start as lucrative hobbies. If you start an Etsy shop, for example, you may think of your business as a fun hobby, even as you get more sales. But having a business checking account adds professionalism and credibility to your small business, even if it started as a hobby. Your clients and customers will be more inclined to trust your business when payments and transactions move through an account that uses your business’s name.
Finally, the issue of professionalism and credibility could affect your taxes in an audit. If you show no profits for three years out of five, the IRS will classify your business as a hobby, and you will not be allowed to deduct any expenses or take any loss for it on your tax return. While maintaining a separate business account for your business does not automatically confer “business” status on a venture, having a business checking account and keeping detailed records of your business transactions can help to show the IRS that you have a legitimate business.
3. Liability Protection
One of the benefits of registering your business as an LLC or corporation is the separation it offers between you and your business. This can protect you from personal liability in case something goes wrong at your business or someone tries to sue your business.
However, just registering as an LLC or other business entity is not enough to provide you with liability protection if you mingle your personal and business funds in a personal checking account. Unless you keep your personal assets and business assets separate, you could make your personal finances vulnerable since the mingling of assets makes it appear as though the business is not a separate entity.
4. Preparing You for Future Growth
Whether or not you intend for your small business to grow, having a business checking account gives you more options for future growth. For starters, having a business checking account legitimizes your business if you ever decide to apply for a business credit card or a business loan in the future.
Additionally, you’ll need a business checking account if your business grows. You’ll have a much easier time handling your financial accounting—including employee payroll responsibilities—if you start with a separate account. Opening a business checking account can be a savvy way to plan for potential growth.
What Do You Need to Open a Business Checking Account?
While you can open a personal checking account with an ID, Social Security number and initial deposit, the requirements to open a business checking account can be a little more demanding. To open a business checking account, you may have to provide the following documentation:
- Social Security number if you are a sole proprietor or Employee Identification Number (EIN) if your business is a corporation, partnership or limited liability company (LLC)
- Government-issued ID, such as a driver’s license or passport
- Business license and Articles of Organization (for LLCs) or Articles of Incorporation (for corporations)
- Organizing documents filed with the state
- Partnership agreement with the name of the business and its partners (for a business with multiple owners)
- Certificate of assumed name/Doing Business As (DBA) name (if you are operating your business under a name different from your legal name, e.g., legal name Li Wei Zhang/ DBA Zhang Consulting)
Choosing the Right Business Checking Account
Selecting the ideal business checking account requires careful consideration of several key factors to ensure it meets your specific business needs and supports your growth trajectory. Here’s what to look for:
- Account Features and Services: Evaluate the basic and advanced features offered by different banks. Essentials like check-writing abilities, online and mobile banking access, and debit cards are a must. However, additional services such as wire transfer capabilities, bill payment options, and even access to business financial advisors can significantly enhance the utility of the account.
- Interest Rates for Deposit Accounts: If earning interest on your balances is important, compare the interest or annual percentage yield (APY) across different banks. Especially in a fluctuating economic environment, securing a competitive rate can contribute to your bottom line. Remember, higher interest rates can offset some of the costs associated with account fees.
- Service Fees: Look into the fee structure of each account. Common fees include monthly maintenance fees, transaction fees, ATM usage fees, and overdraft charges. Some banks offer ways to waive certain fees, such as maintaining a minimum balance or limiting the number of transactions. Understanding these can help in managing costs effectively.
- Branch Banking and ATM Access: For businesses that deal with cash or need in-person services, the availability of physical branches and ATMs is crucial. Consider the location and size of the bank’s network, and whether they offer reimbursements for ATM fees if you use machines outside their network.
- Daily, Weekly, and Monthly Transaction Limits: Depending on the volume and frequency of your transactions, check the limits imposed by the bank. Some accounts offer unlimited transactions, while others might charge extra fees if you exceed set limits. Knowing these can help you avoid unexpected fees and choose an account that matches your activity level.
- Ease of Integration: For streamlined financial operations, check how well the business checking account integrates with your existing business software, such as accounting programs, payroll systems, and other financial management tools. Seamless integration can save time, reduce errors, and provide real-time financial insights.
By carefully evaluating these factors, you can choose a business checking account that not only meets your current needs but also scales with your business, providing essential financial tools and resources to support your operations efficiently. USSFCU small business accounts are designed to excel in all these areas, offering robust features, competitive interest rates, manageable fees, extensive banking network access, flexible transaction limits, and easy integration with business management tools, making them a prime choice for businesses looking to thrive.
Grow with a Business Checking Account
Opening a business bank account is a critical step for any business owner. It provides numerous benefits that can contribute to the success and growth of your business. From separating your personal and business finances to improving cash flow management and protecting your personal assets, a business bank account offers essential advantages that can help you stay organized and make informed financial decisions.