Business Checking Accounts vs. Personal Checking Accounts
At first glance, a business checking account doesn’t seem that different from a personal checking account. Both allow you to make deposits and withdrawals, draft checks or make ACH payments, and make purchases and cash withdrawals with a debit card. And both can potentially save your bacon via overdraft protection.
In terms of how checking accounts work, the main difference between a personal and a business checking account is the cost. The majority of personal checking accounts are either free or have easily waivable fees. Business checking accounts, on the other hand, will almost always have associated fees, and it is nearly impossible to find a truly fee-free business checking account.
While many banks waive their business checking account fees if you maintain a minimum daily balance, have a minimum number of direct deposits per month or spend a minimum amount with your associated debit card each month, these minimum requirements tend to be higher than similar waivers offered for personal checking accounts.
Why Get a Business Checking Account?
Between the harder-to-avoid fees and the more stringent paperwork requirements to open a business checking account, it’s understandable why side hustlers might avoid getting one. But there are a number of excellent reasons why any small business owner can benefit from a business checking account.
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 the business’s 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 on a quarterly basis. 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 off as a lucrative hobby. If you started an Etsy shop to sell your unicorn embroidery on a lark, you may still be thinking of your business as a fun hobby, even as you are earning more and more sales from your magical tea towels.
But having a business checking account adds professionalism and credibility to your small business, even if it started off as a hobby. Your clients and customers will be more inclined to trust your business is legitimate when payments and transactions are undertaken from an account that uses your business’s name.
In addition, having a business checking account allows you to accept credit card payments from clients and customers, since you cannot accept such payments through your personal account without using a payment service provider (and paying stiff fees). Being able to accept all payment types makes you look more professional to your clients, while also increasing your ability to earn money from your business.
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 will need to have a business checking account in the future if your business grows, and you will have a much easier time handling your financial accounting—including any future employee payroll responsibilities—if you start off with that separate account. Opening a business checking account early on can be a savvy way of planning ahead for potential growth.