For a small business owner, tracking financial transactions and compiling your statements are
very important. You’ll need that information to make smart business decisions, but pooling all of your finances into one bank account can make taxes and running a company more difficult.
Without that separation between your business and personal world, your company will run into problems once it scales. For that reason, it’s imperative for you to be financially disciplined, and be prepared for any audit. By combining your finances, you look unorganized, even when you aren’t.
Not only that but your personal credit could be impacted if you rely on it. It’s better to grow and use your business credit so a potential bankruptcy doesn’t appear on your personal report.
Even knowing that, some small business owners will see opening a business account as a
hassle, no matter how much they earn. Is it really necessary to open a separate bank account?
Overview: Personal vs. Business Bank Accounts
Personal bank accounts are mainly used to track personal finances, such as buying a computer to play video games. A business account helps small business owners hold and manage funds
related to their business, such as purchasing or upgrading a laptop for web design.
Depending on your business, a personal purchase can be considered a business purchase, like
in our computer example. But if you use one account, it’ll be harder to tell both purchases apart.
A business account typically includes a business checking or savings account where you can
write and deposit checks, e-transfer, and use a debit card. You’ll come across common account
and service fees, like transaction, maintenance, deposit, overdraft, and ATM fees.
With a business banking account, you get the following advantages:
1. Financial protection from your business if it fails
2. Protection against a low personal credit score
3. Organized expense and audit reports
4. Easier profit and loss reporting
5. Straightforward yearly or quarterly tax returns
6. A clear way to track business deductions
7. Appear more professional and organized
8. Less time spent watching your accounts
9. A better picture of your financial health
10. Lower chance of a government tax audit
While it’s true opening up a new account and tracking multiple credit cards and statements can be a hassle, think of all the time you’ll save when you have both accounts. You won’t have to consistently review your finances, struggle during tax time, or leave yourself open to an audit.
On the surface, a business account operates like a personal account, but if you scale, you may
need the help of a certified CPA to stay organized. By transferring your business profits to a
separate account, you’ll benefit from better bookkeeping habits and increased business credit.
LLC Bank Account vs. Sole Proprietor Bank Account
A freelancer can be a sole proprietor or a register for a single-member LLC, but that same
freelancer needs to form a business with another person or have employees to become a multi-member LLC. Once you’re a multi-member LLC, you have to pay business taxes.
However, a sole proprietor or single-member LLC is still made up of one entity, so they don’t
pay business taxes. Instead, they’ll pay self-employment taxes and only need one bank
account.
According to Kenneth Boyd from AIS-CPA and author of “Cost Accounting for Dummies,” having a separate business account makes it easier to track “job costing,” which is important if every job is different. Plumbers, freelancers, and manufacturers typically have variable overheads.
There are many reasons to open a separate bank account as a sole proprietor, which we’ll get
to, but multi-member LLCs have to open a business account once they register as one.
Pros of Opening a Business Bank Account
Whether you’re a sole proprietor, a part of a single-member LLC, or you’ve recently declared
your business as a multi-member LLC, here are some benefits to opening a business account.
Limited Liability (LLCs Only)
By becoming an LLC, you relieve stakeholders of the company’s liabilities and debt. An LLC bank account proves the business and the owners are separate entities, which is essential
during a legal suit. To open an LLC bank account, you need an EIN and business documents.
Added Protection (LLCs Only)
It’s hard to think of your business failing, but if your credit is suffering, you’re defaulting on loans, and you have to declare bankruptcy, an LLC bank account protects your personal credit. With these two sets of finances separate, you can easily start again should your business go under.
Separate Credit Scores
It will be difficult for you to take out business loans or get the best interest rates on credit cards without any business credit. While you can get financial products for your business by using personal credit, banks will start checking your business credit after your first year as a startup.
Manageable Bookkeeping
When you keep your expenses separate, your bookkeeping becomes a lot easier. When you
pool everything into one account, it isn’t easy for you or your accountant to understand what
sets of numbers are relevant to your business. With two accounts, they’ll instantly know.
Navigable Tax Seasons
Another bookkeeping-related positive to having two accounts is an easy tax season. If you track your expenses as you go, you’ll be able to quickly track your profits and losses. Plus, you can add your business deductions to a separate file as you go, reducing end-of-year tax frustration.
Cons of Opening a Business Bank Account
While there are several positives to opening a business bank account, using two accounts can
be a bit of a hassle. Here are some reasons why you’d want to avoid separating your expenses.
Giving Up Sole Control (LLC Only)
When you declare your business as a multi-member LLC, you give up sole control over your
finances. All LLC owners will have access to your account, which may make you uncomfortable. However, you can create visibility by tracking your funds with bookkeeping software.
Difficult Tax Season (LLC Only)
While it’s true that separating your funds makes tax season easier for all businesses, it can also complicate it if you’re a part of a multi-member LLC. Multi-member LLC owners have to file business and personal taxes, so it’s crucial that you’re diligent with separating your finances.
Extra Fees and Costs
Opening up a bank account is usually free, but you’ll have to pay a flat fee every month to keep
it open. You pay high fees for certain transactions, so be careful. Forming an LLC can cost
anywhere from $40-$1000+, depending on your state and whether you’re using a lawyer.
The Verdict
Sole proprietors and single-member LLC owners should open up a business bank account to
earn business credit and make their bookkeeping easier. You will need to pay a small fee to
keep your new account open, but any amount is worth a more streamlined tax season.
If you’re already an LLC, know that you won’t need to open up a separate business bank
account until you transition to a multi-member LLC. However, your single-member LLC is still
considered a separate legal entity, so it’s a good idea to open up a business account anyway.
After becoming a multi-member LLC, you are legally required to open a business account. While registering is expensive, you’ll be able to scale faster and pay fewer taxes on your purchases.
Save yourself the headache and hassle of managing your business' books by separating your personal expenses from your business expenses. This frees up more time for you to grow your business and turn neighbors into customers on Nextdoor. Get started by claiming your business page.
