Your first sale on Upwork or Fiverr may not have prompted you to immediately create a company checking account. Even if you want to operate your firm as a solopreneur or on the side, you will eventually require a separate bank account to handle financial transactions.
Therefore, you’ll have to decide on a business structure and establish a legal corporation. Consult a lawyer if necessary, but an LLC is a good place to begin (LLC). Rocket Lawyer makes this a quick and easy process. If your firm grows and you find you need a more solid structure, you may simply switch to a different legal entity.
Reasons Why You Need a Business Bank Account
So why go through all the hassle of opening a company checking account? Putting in an extra hour or two of effort now may save you a ton of time, energy, and money later on. If you own a small business and are on the fence about opening a business bank account, I urge you to read on.
To be viewed seriously as a legitimate firm is the primary motivation for opening a business bank account. Let’s say you decide to talk to a possible business associate. To convince them to hire you, you give them a sales pitch. You manage to convince them, and they ask for a deposit, which you provide in the form of a personal check.
A business account is not required, but it will likely raise some eyebrows and prompt some inquiry as to why you don’t already have one. They may start to question your company’s legitimacy and decide twice before doing business with you.
Consider, instead, the scenario where you need to issue a refund to an unhappy consumer. Is it something you would do to transfer them money straight from your own bank account?
Using a personal bank account to pay for company costs gives off a suspicious, unprofessional vibe. Having a company checking account shows that you mean business and want to continue in the industry for the long haul.
- Identity and Privacy Protection
There are much more monetary transactions that occur between businesses than between people. They often do trade with individuals and organizations all across the globe. It also implies that scammers, identity thieves, and fraudsters will have more chances to target you and your account in order to steal your money.
Having a separate bank account for your company allows you to keep your business and personal finances completely separate. If you’d rather not use your SSN for identifying purposes, an EIN can be used instead (SSN). The less likely identity thieves are to obtain your Social Security number and other personal information, the better.
In spite of con artists, secrecy is valuable in and of itself. Use separate companies and bank accounts to avoid having every Joe, Moe, and Joe public know your true identity. When renters started knocking on my door at 9 o’clock at night, I quickly learned that lesson the hard way as a landlord and real estate investor.
- Accounting and taxation reasons
Your financial records will be a lot less cluttered if you maintain separate accounts for company and personal spending. Maintaining accurate financial records may save time and money in a number of ways.
To start, it simplifies the process of filing your taxes. Business revenue and costs should be reported on a distinct line from personal income and deductions, regardless of whether you do your own taxes using the free online tax software from H&R Block or pay an accountant to do it for you.
If you do your own taxes, keeping them separate from the start will save you time, and if you hire an accountant to do your taxes, it will reduce your accounting fee.
It’s far too simple to forget about tax-deductible company costs when personal and corporate finances are kept together. A business checking account will help you avoid losing out on tax incentives.
Avoiding the opposite error of fraudulently claiming personal spending as corporate expenses is also facilitated. This error can lead to a stressful audit by the Internal Revenue Service.
If your business and personal finances are mixed up in a single checking account, you’re asking for trouble if you ever get audited for taxes. The defense of an audit is greatly simplified by clean records.
Even if you’re only doing it on the side, it’s still smart to set up a business and a separate bank account. Though it may appear too complex at first, doing so will end up saving you both time and money in the long run.
The primary purpose of a limited liability company is to confine the personal financial responsibility of its owners to the value of the firm itself. Imagine you had $200,000 in assets and $250,000 in home equity.
A total of $50,000 is shown as assets for your company. In the event that a third party successfully sues your company and obtains a judgment against you, they will only be able to seize the assets of the company itself and not your personal possessions.
If you mix corporate and personal funds, you nullify the protections afforded by the corporation’s separate legal status. For then, the plaintiffs and creditors can go after everything they want.
Having a legal entity protects you from legal action only if you maintain a wall between your personal finances and business transactions.
To put it simply, the plaintiff sues your business and also names you as an individual defendant. “Piercing the corporate veil” means that the plaintiff is going for not just the company’s assets but also your own.
The next step is for you and your lawyer to petition the court to have your personal name removed as a defendant in the litigation, and the court may ask for proof that you genuinely run the business independently.
Separate company and personal bank accounts would suffice as such evidence.
- Services for Merchants
Want to accept payments from consumers that use their credit cards or online bank transfers? In that case, a separate business bank account is required. Information about your company’s bank account is one of the first pieces of data often requested when applying for a merchant services account to accept payments online. To put it simply, personal checking accounts can’t be used to pay for company expenses.
Do your research on what to look for in a payment processing provider before committing to one. The world of merchant services and payment gateways is a complex one.
You may be a sole proprietor now, but that doesn’t rule out someday teaming up with another business owner. When that time comes, you’ll need a separate, neutral business checking account to handle all of your financial needs.
Remember that your company partner lacks the authority to access your personal finances in any way.
Furthermore, saying “I use my personal bank account to manage my business” is like informing a potential partner that you still live at home with your parents. A good business bank account is essential for you and your partners to be able to execute typical company activities.
- Relationships with Commercial Banks
Perhaps you view your bank only as a service provider to you personally. The end of the narrative is that they hold your money and provide you a debit card.
However, banks and companies have a far deeper, often collaborative, connection. In addition to a business checking account, these financial institutions may also provide other credit services that might be crucial in the development of your company.
You should also know that the provision of loans and credit is only the beginning of your relationship with the bank. Frequently, they offer assistance with payroll processing, tax services, and escrow accounts. When a company expands, it often needs to open several checking accounts for its many divisions and operations.
Establishing a business checking account is the first step in developing a working relationship with a bank.
- Build Company Credit
Know first and foremost that opening a business bank account will not instantly establish your company’s creditworthiness. However, it does provide the opportunity for you to do so.
A company bank account is a prerequisite to establishing a credit line or applying for a loan.
One of the numerous prerequisites for getting a business credit account is opening one. Bank statements are required when applying for a company loan, and lenders favor borrowers with a lengthy banking history.
Your banking partner for your firm might also be a valuable early reference. It is possible that a reference letter from them might assist you get a loan or line of credit from somewhere else.
- Allow Your Company to Be Sold
The vast majority of business owners eventually sell their companies, even if they have no plans to do so right now. Even if your firm is too tiny to sell at the moment, you will likely want to sell it at some point in the future.
The financial statements of a target firm are an essential first step for every prospective buyer. Giving a potential buyer your personal bank statements that you’ve marked up to identify business from personal activity isn’t the best way to gain their trust. Also, it doesn’t shed much light on how healthy your company’s finances actually are.
Having a clear separation between your business’s and your personal finances is made possible by maintaining two distinct bank accounts. Furthermore, do you really want prospective purchasers to examine your personal bank statements from the past three years?
Prepare the basis for selling your firm in the future by making the changeover now, long before you wish to accept sales offers.
A corporate bank account is essential for any company, no matter its size. Whether you want basic business checking for free or a high-end account with all the bells and whistles, you can find what you need today.
Investigate all of your banking alternatives thoroughly before making a final decision, and begin setting up your company for future expansion immediately.