Published in: Banks | March 26, 2019

Do You Really Need That Business Checking Account?

small business checking account

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.

How business checking accounts work

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.

Personal checking accounts vs. business checking accounts

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.

What do I need to open a business bank account?

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:

  • A state-issued ID  
  • Social Security number (if you’re a sole proprietor) or EIN (employer identification number)
  • Business license and Articles of Organization (for LLCs) or Articles of Incorporation (for corporations)

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.

Do I need revenue to open a business bank account?

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.

Can I use my personal checking account for business if I’m a sole proprietor?

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.

Can I use my personal checking account for business if I have an LLC or a corporation?

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.

Why you do really need that business checking account

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.

What to look for in a business checking account

  • Low fees
    Business checking accounts are more likely to come with fees, but you want to minimize these as much as possible. It’s important to avoid monthly maintenance fees whenever possible. If you’re comfortable with online banks and bare-bones services, there are some free business checking accounts out there. If you want an account with more robust features, look for one that waives the monthly maintenance fee if you maintain a certain balance.
  • Low minimum opening deposit and minimum balance requirements
    Most business checking accounts will come with a minimum opening deposit requirement, although many are quite low. Especially if you’re just starting out and don’t have much revenue yet, you’ll want to look for an account that doesn’t require you to deposit much. Additionally, the account might require you to maintain an average daily balance in order to waive monthly service fees -- look for accounts with balance requirements you can meet.
  • High interest rates
    Higher interest rates are always better. However, it shouldn’t be a top priority. No checking account is going to give you impressive returns for your money, and opting for a checking account with a higher interest rate could also come with higher monthly fees that cancel out any earnings you’re making.
  • High deposit and transaction limits
    Many people don’t realize that business checking accounts often come with limits as to how many transactions you can complete each month and how much money you can deposit each month. After that, you’ll have to pay a small fee. It’s important to pay attention to these limits because -- especially if you plan to grow -- you’ll probably be moving cash in and out of your business bank account at a much higher rate than you would with a personal bank account.
  • Employee debit cards
    If you have employees and want to give them limited access to your business checking account so that they can make purchases on behalf of the company, choosing an account that offers employee debit cards can be helpful. However, you can also get a business credit card and order extra employee credit cards -- the best business credit cards can help you earn lucrative rewards and cash back.
  • Physical branch locations and online services
    Some of the best free checking accounts are being offered by online-only banks. These accounts are great for folks who are comfortable with doing everything digitally, as you can get all of your banking done from the comfort of your own home. However, if you’re old school and prefer to do your banking in person, you’ll want to make sure that there are physical branch locations near where you live.
  • Sign-up bonus
    This shouldn’t be a primary concern, but if you’re deciding between a few business checking accounts that are otherwise equal, check to see if any of them offer a sign-up bonus. Some business checking accounts will award new customers with a cash bonus for making an initial deposit over a certain amount and maintaining that balance for a pre-specified period of time.

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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