Business checking account vs. personal checking: What you need to know
When you start a new business, you have an endless to-do list, from deciding your business name and legal structure to purchasing licenses, finding office space, hiring employees and figuring out your business banking. As a business owner, there are many things you need to have in order to get started.
Many people skip over setting up a business checking account, figuring they can worry about this later when they start making serious money. Others, however, decide to use a personal checking account for business needs.
Here, we explain why it’s so important to set up a business checking account at the very start of your business.
What’s the difference between a business account and a personal account?
When you compare business checking accounts to personal checking accounts, they look pretty similar. Both allow you to make deposits and withdrawals, draft checks and make purchases and cash withdrawals with a debit card. Typically, both offer overdraft protection and online banking.
Here are three key differences between the two types of accounts:
- Employee debit cards: Some business checking accounts allow you to order employee debit cards, which enables employees to make purchases and withdraw money using the business’s checking account. As the primary debit card owner, you can set spending limits and ATM withdrawal limits for employee cards.
- Monthly fees and balance requirements: Most business checking accounts tend to have higher fees and more stringent account balance requirements than personal checking accounts.
- Account set up: Typically, business accounts require more paperwork to set up.
Higher maintenance fees and the challenge of account set up often cause a business owner to avoid establishing a business account altogether. But you’ll see in this article why business checking accounts are so valuable. The bottom line is that they help business owners separate their finances.
Why should you use a business checking account vs. a personal checking account for your business?
If you operate your business under a legal entity that is separate from you, such as an LLC or a corporation, you are legally required to separate your company’s finances from your personal finances. This could mean that you set up a separate personal checking account rather than a business checking account for your business. But many banks require a business account if you’re applying as an LLC or corporation. Also, using a personal bank account for your business transactions can invalidate any limited liability you receive through the legal entity you’ve registered.
If you are a sole proprietor, you’re not legally required to use a business checking account. But from a business management standpoint, it still makes sense. Also, many banks have terms and conditions stipulating that their personal checking accounts shouldn’t be used for business transactions.
Here are some reasons you would want a business checking account, even if you don’t legally need one.
Accurate and clean bookkeeping
If you combine business and personal activities in a single account, you end up with a major headache as you try to sort through everything to pay your quarterly and annual taxes. Remember that you will need to keep all your receipts and invoices to match up with your bank statement and checkbook.
Tax and legal implications
Having separate accounts makes it easier for you to categorize business versus personal outlays and enables you to deduct business expenses for taxes. Also, if your business ever gets audited, combined accounts could result in both your personal and business transactions being audited.
Distinguish between business vs. hobby
The IRS expects you to show proof that you are a business and not a hobby. For better record keeping purposes, having a separate business bank account helps you prove that you are running a legitimate business, not a hobby.
Builds your professional business brand
When you’re in business, image is critical. You want your business to come across as the best of the best. Having a business checking account adds professionalism and credibility to your business.
That’s hard to do if you write checks from your personal checking account to buy inventory for your business. Also, clients may be hesitant to deal with you if they pay you personally, rather than paying the business.
Credit card payments
Having a business checking account enables you to accept credit card payments from clients and customers, something you can’t do with a personal checking account unless you use an expensive payment service provider. A business account also allows you to have a business debit card, something you will want if you have employees who make business expenditures.
Peace of mind with secure encryption
Since you will be using your business account for a large number of transactions, the chances of fraudulent activity or identity theft is higher. A dedicated business account with secure encryption will give you peace of mind with spending alerts and notifications to keep your money safe.
Enable future growth
Having a business checking account is essential if you’re planning to grow your business. Building a relationship with a financial organization may make it easier for you to apply for a business loan or access additional business services, such as payroll or taxes, to manage critical elements of the business separately.
Choosing the right business checking account
As a small business owner, here are key factors to consider when choosing the right business checking account:
- A bank with a small business focus: This type of bank will be committed to giving you the most hassle-free, simple way to bank.
- A business account with low or no monthly fees:This will be helpful to you as you manage the money you’d like to invest in your business.
- A good interest rate: This can make a big difference in the long run.
- Minimum requirements and limits: It would be great to not have to meet a minimum deposit requirement, a minimum balance requirement or even an opening deposit requirement.
- Quick access to cash:This is another important benefit.
- Simplicity: As a small business owner, you have a lot on your plate. The easier it is to get information from your bank, the better.
- Online banking: Not having to drive to a branch can be a big time saver.
- ATM accessibility: Having access to free ATMs is a big benefit.
What Kabbage Checking™ has to offer
Kabbage distinguishes itself from other business banks in having no set-up fees, balance requirements or monthly maintenance fees. You can use your Kabbage Debit Mastercard® to withdraw cash through a network of free ATMs and deposit cash at over 90,000 retail locations nationwide. Perhaps most importantly, you get to take advantage of our industry-best interest rate of 1.10% APY for balances up to $100,000.
Learn more about Kabbage Checking can support your small business.
Have questions about business accounts vs. checking accounts? Check out our FAQs on this topic.
Do you need business revenue to open a business checking account?
You do not need to show a profit or earn money before you open your business checking account. In fact, opening a separate business checking account should be one of the first things you do when you start your business.
Many small business checking accounts, however, may require a minimum opening deposit. Be sure to read the terms, conditions and fee schedule so you know what the requirements are.
What factors should I look at when comparing business checking accounts?
Look for a bank with a small business focus. Look for a business account with low or no monthly fees and a good interest rate. Look for an account with minimum requirements.
What is required to open a business checking account?
The specific documents you will need will differ depending on whether you are a sole proprietor, a partnership, an LLC or a corporation. You will typically need a social security number or employer identification number, personal identification, a business license, information on your assumed name and monthly credit card revenue.