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Small Business
by Elizabeth Aldrich | Updated July 17, 2021 – First published on March 26, 2019
Image source: Getty Images
Image source: Getty Images.
Anyone who’s ever started a business has experienced the never-ending to-do list of logistical errands you need to complete in order to get properly set up. You might be tempted to rush through the beginning stages and get to doing what it is your business actually does, but having the proper set-up for your business will save you plenty of headaches — and money — in the long-run.
A big part of that set-up is deciding how to manage your business finances, and one of the most common questions is whether or not to get a business checking account. Here’s our take on business checking accounts, including when you need one and when you don’t.
Business checking accounts are meant to help business owners separate their finances. They work similarly to personal checking accounts but there are some key differences. Whether or not you legally need to have a business checking account depends on the legal structure of your business.
Business checking accounts function the same way as personal checking accounts but they tend to have different fees, limitations, and balance requirements.
Personal checking accounts are often free or come with a low fee that can be easily waived, while business checking accounts tend to come with higher monthly fees that might not be waivable. That being said, free online checking accounts for small businesses are becoming more common. Interest rates on business checking accounts are also lower on average.
Finally, some business checking accounts offer the option to order employee debit cards, which allows employees to make purchases and withdraw money using the business’s checking account. As the primary cardholder, you can set spending limits and ATM withdrawal limits for employee cards.
Another big difference between personal and business checking accounts are the application process and eligibility requirements. Just about anyone can open a personal checking account, but in order to open a business checking account, you’ll need to show some extra documents.
Documents will usually include:
The exact documentation you need to provide will depend on both your legal structure and the bank you’re applying to. In general, sole proprietors mostly provide their own personal information, while LLCs and corporations will need more business documentation as well as personal information from all major owners.
You do not need to be making any money yet in order to open a business checking account. In fact, opening a separate account for your business should be one of the first things you do, even before you start selling your products or services.
As a sole proprietor, you’re not legally required to use a business checking account. This doesn’t mean that a personal checking account is advisable for sole proprietors. Additionally, your bank might have certain terms and conditions that specify their personal checking accounts shouldn’t be used for business transactions, so it’s best to double-check with them as well.
If you operate your business under a legal entity that is separate from you — such as an LLC or corporation — you are legally required to separate your company’s finances from your personal finances. While this doesn’t necessarily mean you need a business checking account, it does make the most sense, and some banks may require it if you’re applying as an LLC or corporation. What’s more, using a personal bank account for your business transactions can invalidate any limited liability you receive through the legal entity you’ve registered.
While you may be able to get away with using your personal checking account for business expenses, it’s almost never advisable. It’s worth repeating that opening a business checking account should be one of the first things you do as a business owner. Here are some of the biggest benefits that come with handling your company’s finances through a business checking account.
Simplifies your taxes — Would you rather spend a few minutes opening a business checking account now, or hours sorting through your jumbled up finances come tax season? Having your business and personal finances completely separate is crucial to getting your taxes done quickly and accurately. Plus, you could lose out on important money-saving deductions by not having a business checking account. Not only will it be harder to identify expenses you could have deducted, but it will also make it more likely that you get audited by the IRS.
Protects your liability — If you’ve registered as an LLC or corporation in order to limit your personal liability, your personal assets are generally protected if anyone tries to come after your business. However, mixing up your personal and business finances makes it more likely that a court could go after your personal finances as well because it doesn’t look like you are, in fact, running a separate entity.
Gives you credibility — Having a business checking account helps your business look less like a hobby and more like a legitimate business. Clients will be more inclined to trust you if your checks and payments are coming from an account that’s under your business name. Plus, business bank accounts can be used to verify the legitimacy of your business when it comes time to apply for a business credit card or a business loan.
Helps you assess performance — Keeping separate finances gives you a clearer picture of how your business is performing. You can easily and immediately see your costs and revenue for each month, giving you a sense of when you’re on the right track and when it’s time to change gears.
Builds a business banking relationship — Many business owners don’t realize that business credit scores exist, but they’re an important factor when it comes to applying for funding like small business loans. While a business checking account won’t necessarily help you build business credit, it will help establish your business, which will signal to credit bureaus that it’s time to create a credit report for it. Plus, building a business banking relationship with a bank you like can help you get your foot in the door for business credit cards and business loans with that same bank.
Once you’ve opened a business checking account, it’s time to start considering a good business credit card and a business savings account. The former will get you started on earning rewards for your business spending and building business credit, while the latter will give you a place to park your cash when you start making more than you can spend.
Whether or not you’re legally required to have a business checking account, it’s a good idea to open one early on. Doing so will save you a lot of time in the future, and it could save you money as well.
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Elizabeth is a writer specializing in credit cards, debt repayment, and small business. Her work has also appeared on MSN Money, Yahoo! Finance, and Business Insider.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
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