Why You Need a Business Bank Account as a Self-Employed Individual

As a small business owner, you’re not legally required to have a business bank account. However, the longer you mingle your business and personal finances, the more likely you are to regret it.

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Separating your business and personal bank accounts can be a pain, but it’s highly recommended. Having separate accounts makes it easier to file taxes and qualify for loans. Not to mention, it could benefit your business’s bottom line.

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According to the IRS, your business needs a recordkeeping system that shows your income, expenses, and tax deductions and credits. A business checking account is sufficient for most small businesses, but it’s not the only solution. An electronic accounting software program like Quickbooks could also be a good fit.

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If you’ve already combined your small business and personal finances into one account, the prospect of separating them can be daunting. But the list of benefits is long.

Benefits of Having a Separate Business Bank Account

• Keep business and personal finances separate
• See all of your business transactions in one place
• Save time on itemizing and categorizing deductible expenses for tax filing
• Avoid confusing your business revenue for personal income
• Take advantage of business-oriented account features
• Demonstrate your legitimacy to clients you transact with
• Pull clear and accurate records on business operations for potential creditors and investors
• Track and address business cash flow issues
• Help you form an LLC
• For LLCs, protect your personal assets from business liability

Downsides of Opening a Separate Business Bank Account

Mainly, you’ll have to get used to using a new system. Here’s why some small business owners are hesitant:

• Time required to apply for a new account
• You may need a Taxpayer Identification Number (TIN) or Employer Identification Number (EIN)
• Time invested up-front to redirect payments and deposits to the correct account
• More bank accounts to manage (instead of just one mixed account)

You’ll also need to save supporting documents for tax filing. For example, if you purchase office supplies or office furniture at Target, you’ll need to save the receipt showing that the items you purchased were for your business and not for personal use.

Does Your Business Structure Matter?

Having a separate business bank account is a bigger legal concern for single-member LLC owners (also referred to as members) than for sole proprietors.

Sole proprietors, including independent contractors and freelancers, are not considered legally separate from their businesses. In other words, you are your business, so you’re personally liable for all business debt, taxes, and legal actions taken against the business.

For that reason, there’s less incentive to have a separate business bank account as a sole proprietor. But separate bank accounts are strongly recommended for LLCs, since one of the main purposes of forming an LLC is to reduce your personal liability.

Types of Business Bank Accounts for Self-Employed Individuals

Many banks offer business checking accounts and savings accounts. The main difference between these accounts and personal accounts is they have more features built for managing business finances.

• Business checks
• Employee debit cards
• Invoicing capabilities
• Accounting features

Business bank accounts also have different fees, some of which apply to your transactions and cash deposits.

How to Choose the Right Business Bank Account

Choosing a business bank account is more complicated than just searching for one at your bank. The features on a business account can help improve your operations, or overload you with fees.

Here are some account features to compare:

• Financial management tools:
• Integration with your preferred accounting software and payment platforms
• Subaccounts or digital envelopes that let you budget and save for expenses like taxes
• Cash flow projections
• Balance requirements:
• Minimum opening deposit
• Minimum daily balance
• Minimums to earn interest or other benefits
• Activity limits:
• Transaction limits
• Cash deposit limits
• Annual percentage yield (APY)
• Cash bonus for opening a new account
• Discount rate (percentage charged for each transaction)
• Cash deposit processing fee
• Monthly maintenance fee (you may qualify for a waiver)
• Minimum account balance fee
• Paper statement fee
• Employee functions:
• Customizable spending limits for employees
• Direct deposit for paychecks

What Documents Do You Need to Open a Business Bank Account?

You don’t need to be an LLC or corporation to open a business bank account — sole proprietorships can open them too — but you typically need to provide the following documents and information:

• Business registration documents
• Business license
• Two forms of ID
• Proof of address
• Supplier and vendor contacts
• Financial statements
• SSN (if you’re a sole proprietor), TIN, or EIN

All authorized signers on the account may have to be present at the bank.

Tips for Keeping Your Personal and Business Finances Separate

Opening a separate business bank account is one of the easiest ways to keep your business and personal finances separated.

As long as you use each account for its intended purpose — meaning you don’t charge personal expenses to your business account, or vice versa — you’ll find it easier to track your personal budget and understand how much your business is making.

If you’re not sure how to make the transition to a business bank account, consider reaching out to a small business mentor at SCORE or the Veterans Business Outreach Center (VBOC) for free guidance.

Take an owner’s draw or salary once you have separate accounts. This can help you build the habit of budgeting with a predictable, livable wage and prevent you from draining your business revenue for personal expenses.

Form an LLC to separate your finances from your business and create more legal protection for your assets.