Everything You Need To Know About Business VS Personal Checking
While it's possible to use a personal checking account to run your small business, a business account can offer serious benefits and limit your personal liability and risk.
Separating your personal and business income is a smart idea — even if your business is new, very small, or just a side hustle. Understanding some important differences between a business bank account vs. personal checking and savings can help you see why.
Table of Contents
- What’s The Difference Between A Business Bank Account VS Personal?
- Do I Need A Business Bank Account?
- How To Get The Right Business Bank Account
- FAQs: Business VS Personal Checking Accounts
What’s The Difference Between A Business Bank Account VS Personal?
The difference between a business bank account and a personal account is very small, on the surface. A business checking or savings account looks and works pretty much like a personal account.
Dig a little deeper, though, and you’ll see some key differences.
Having a business bank account delivers these key benefits:
When you use a personal bank account to handle business finances, you must have to be extra careful to track expenses and keep your personal and business expenditures separate. With a business account, that separation occurs naturally.
You’ll really see the benefits when it comes time to file your taxes, and doubly so if your business is audited by the IRS.
As hard as it may be to hear these numbers, almost half of new businesses won’t make it for five years. In fact, about one in five new businesses will fail within its first two years.
While you’re certainly doing everything you can to beat the odds, it just makes sense to protect your personal assets and savings. Having a separate business bank account that you use only for business transactions means that any claims or judgments against your business — for things like unpaid debts — can be applied only against your business assets, leaving your personal funds safe.
Enhanced Legal Protections
If you run your business by yourself as a freelancer or independent contractor, you’re likely a sole proprietor, and you may be able to use your personal bank account to run things until your business grows a bit.
However, if your business is a partnership, LLC, or corporation, your business is an entity that’s legally separate from you personally, and you are required to separate your finances.
It’s not just a legal requirement; it’s also a smart idea. When you separate business and personal finances, your personal assets are protected from financial liability if your business is sued or faces bankruptcy.
Brand Identity Benefits
Having a business bank account is a giant step toward establishing a strong brand identity and projecting a professional image to everyone you do business with.
How so? When you use your personal account to run your business, customers make payments to you instead of to your business name. Any payments you send out for services, supplies, and other business expenses come from you personally.
Use a business bank account and that changes. Customers make payments to your business, instead of to you personally, and the payments you make come from the business and not from you.
If you plan to hire employees now or in the future, you may want to give them access to business funds to make purchases or pay bills on the business’s behalf. You won’t want to give them your personal account number or debit card. So you’ll need a business account.
Opening a business bank account can also open doors to financial opportunities that just aren’t available to personal account holders. For starters, you’ll be able to build your business’s credit rating. And that will allow you to eventually apply for a loan, line of credit, or business credit card. You could even become eligible to access Small Business Association loans.
Credit Card Processing
Business bank accounts also include merchant services that allow you to accept credit and debit card payments from customers. While your bank is not your only option for merchant services, you can’t access those services through your bank with only a personal account.
Related: You have many options for merchant services, including POS systems for processing in-person payments. If you want to explore your options, take a look at our list of the best POS systems.
So far, the differences between business checking and personal bank accounts seem pretty positive overall. There are a couple of differences that aren’t necessarily negatives, but they’re definitely things to be aware of:
- More Paperwork: When you apply for a business bank account, you’ll need to show proof of your address and personal identification. You’ll also be asked for your employer identification number (EIN), your business license, business formation documents, any ownership agreements, and proof of monthly income. For more information, see our checklist of the documents you need to open a business account.
- Different Fee Structures: Business accounts often come with transaction fees, minimum account balances, and transaction limits. Ask about these and other fees and limitations when you’re looking for the best business bank account for your business. Avoiding unnecessary fees is important for all small business owners. If you’re a freelancer or self-employed person working on a shoestring budget, it’s even more important. You can avoid almost all fees if you choose your business bank account from our list of the best banks for freelancers.
Do I Need A Business Bank Account?
If you’re still involved in the day-to-day effort of setting up your business or if your time is dominated by the hard work of getting a new business up and running, banking may be the last thing on your to-do list. You may also feel that you’re doing just fine using your personal bank accounts to get your startup off the ground. Do you really need a business bank account?
It may be okay for now to use your personal accounts, but there are some very good reasons for getting a business bank account as your business grows.
Converting to a business bank account will solidify your brand and build your reputation, limit your personal liability risks, and streamline your bookkeeping and tax-paying responsibilities. Those are among the top benefits of using business banking services, and three very good reasons why the switch to business banking might become one of your priorities sooner than you think.
How To Get The Right Business Bank Account
Having a business bank account offers some advantages and protections that small business owners using personal accounts simply cannot access. So even if you’re not quite ready to make the move to business banking, it’s probably something you should start looking into and planning for, so you’re ready when the time comes.
Once you’ve made that decision, you may be wondering what you need to know to find and open the right bank account for your small business.
Our best advice: take your time, know your needs, do your research, make your choice, and then focus your attention back where it belongs — building the strongest foundation possible for your small business success.