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Published On: April 26, 2022

Small Business Checking Account Basics

Small Business Checking Account Basics

There is a lot that is involved when establishing a business. The seemingly endless to-do list of things that need to be done can tempt you to rush through the early stages so that you can start operations as soon as possible. However, if you want to avoid headaches and save money in the long run, having the right set-up for your business is crucial. A significant part of that set-up is figuring out how you will manage your business finances. And, one of the key questions regarding finances is whether you should open a small business checking account.

While you have a choice to either open a business checking account or to use your personal checking account for your business transactions, every small business or professional venture needs a business checking account. Professionalism requires that you separate your business transactions from your personal banking. One of the first things that you need to do when starting a business is to open a small business checking account.

Basically, a business checking account is vital to your business’s financial operations. You will use this account to receive deposits from clients, pay your employees and vendors, prepare for taxes, and establish the business’s financial presence. A business bank account is essential, no matter how small you are starting out.

What Is a Business Checking Account?

While both personal and business checking accounts offer things such as debit cards and check-writing, small business checking accounts have several features which are not associated with personal checking accounts. For instance, when you open a business checking account, you can expect the following business features:

A business checking account is also different from a personal checking account when it comes to aspects such as account opening, fees, minimum deposit required and minimum balance requirements.

A business checking account is used for day-to-day financial transactions of the business, such as receiving or transferring funds electronically, depositing or withdrawing money using a business debit card, paying vendors using checks and depositing customers’ checks.

What Do You Need to Open a Business Checking Account?

It’s quite easy to open a personal checking account. Usually, the bank asks for your identity document (ID) and Social Security number. With a small business checking account, you are required to furnish the bank with more requirements, making the account opening process more tedious. Banks commonly ask for the following documents when opening a business checking account:

  • Employer Identification Number (EIN), or your Social Security number (if you are a sale proprietor)
  • Business license
  • Government-issued ID
  • Business formation documents
  • Ownership agreements

The Benefits of Having a Small Business Checking Account

Although you can use your personal bank account to manage the financial operations of your business, it is more beneficial to open a small business checking account instead.

Here are some of the benefits of having a small business checking account:

Organized and Clean Bookkeeping

One of the major benefits of having a business checking account is that it allows you to separate your business transactions from your personal transactions. If you use your personal account for your business transactions, it will be difficult to keep bank statements organized. Determining essential business financials like profit margin will also be difficult. Having a separate business account will help to keep your books organized, clean, and streamlined.

Simplified Tax-Paying Process

Having a business checking account also helps to simplify paying your taxes. If you mix business and personal transactions, it makes it harder to file your taxes accurately. Not filing taxes correctly can attract Internal Revenue Service (IRS) penalties. Having a business checking account also allows you to deduct certain business expenses on your taxes, and you can easily identify such expenses if your accounts are separate. Before expenses are deducted, the IRS requires proof that such expenses are for the business. And, to prove the business expenses you a business account statement is necessary.

Professionalism and Reliability

No matter how small you start, if you want people to take you seriously, it is necessary to have a business checking account. A business checking account helps to add professionalism and reliability to your small business. One of the best ways to prove that your business is legitimate is by having a business checking account. Prospective clients or customers will take you seriously if they know they are making payments or deposits into a business account.

It is important to note that the issue of reliability and professionalism can affect your taxes during an audit. If you do not record profits for three out of five years, your business will be classified as a hobby by the IRS. In that case, you cannot deduct expenses.

Liability Protection

Small businesses are just as vulnerable to legal trouble as large corporations. For instance, an unpaid vendor or a disgruntled customer can sue you. And, if you experience a liability issue as a business, the court will require your business banking records in order to determine if business funds were mixed with personal funds. If the court concludes that your business is not being run as a separate entity, it may hold you personally liable if someone tries to sue your business or if something goes wrong in your business. But if you have a business checking account, it is proof that your company is a separate legal entity capable of suing and being sued, meaning the court cannot hold you liable if your business is sued.

The Bottom Line

If you are serious about establishing a legitimate business with the goal of experiencing steady growth, it is important for you to handle your business finances well. And, one of the best ways to ensure that you effectively manage the financial operations of your business is to have a small business checking account from the onset. If you have been running your small business for a while without a business checking account, it is probably high time you opened one.

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