Are you using your personal accounts for your business?

If you're using your personal bank account for business, you might want to rethink that practice. As small business banking provider Novo suggests, separating your personal and business finances will improve how you manage your finances, simplify your tax filing, and make it easier to deduct business expenses. Whether you're an established business owner or a freelancer with a side gig, it's important not to mix personal and business finances.

In this guide, we'll explain the various accounts for business and who needs one.

You can use your personal bank account for your business, but the IRS does not recognize a sole proprietorship as a legally separate entity. You would need to ensure you keep track of which transactions are for business, record your receipts separately from your personal receipts, and clearly label those transactions as business expenses and credits. All this becomes important when you sit down to file your income tax return come tax season.

The benefits of opening separate business bank accounts

A business bank account can make your business life smoother beyond simple cash flow. By separating your personal funds from your business money, you will safeguard your personal assets. You also make it easier to manage invoices and tax deductions.

Some other reasons for having a separate business bank account are:

• Simplify tax preparation. If you use dedicated business accounts rather than personal accounts for your business transactions, it will be easier to file your taxes come tax season. Untangling business and personal expenses is already done. It can also be easier to categorize expenses and identify deductions because many small business checking accounts integrate well with popular business accounting software. Some business checking accounts for freelancers have tax-planning tools built in, which makes filing your estimated tax payments a breeze.
• Streamline recordkeeping. Tracking transactions is not the only reason to have a small business checking account. Separate business accounts keep you organized and make it easier for you to reconcile your business checking accounts. It makes generating financial statements easy, which you need to track your business' progress as well as for applying for business loans and grants. It is also easier to track outstanding invoices with a business checking account, and you create a clear audit trail.
• Protect personal assets. If you operate your business as an LLC, partnership, or corporation, your business' legal structure can shield your assets should you be involved in a lawsuit. If you mix your personal finances and business funds, you jeopardize your protection. So it is best to use a business bank account for corporate transactions.
• Legitimize your business. Just having your business name on your business checks, business debit card, and business credit card makes your business look more legitimate.
• Avert overspending. Since you will have a clear view of what business income you have coming in each month and can see what your monthly transactions are, cash management is easier. You have a better idea of how much money you can spend.
• Encourage saving. Paper and ink, business cellphones, electricity, water, and internet are not the only monthly bills you will have. You will want separate savings accounts for estimated tax payments, your regular business savings, and your retirement fund. Setting aside business funds for those three savings accounts before you pay your bills is a great habit to get into. After all, life happens, and you need to have a cushion to lean on when the unexpected happens.

If you are a sole proprietor and choose to use your business account for personal transactions or your own bank account for business transactions, just make sure you keep a solid paper trail to prevent any issues. Most accounting software has apps that allow you to snap a picture of your receipt, which automatically records and categorizes your transactions. There are also stand-alone apps that do the same thing.

When you need to open a business checking account

When your business grows and becomes more consistent, you should open business accounts. If any of the following are true, you must open separate accounts:

• You are going to incorporate your business. The IRS requires such businesses to have a business bank account.
• You need a business loan. A separate account for your business is typically a prerequisite, as lenders will not approve funds unless there is a business bank account.
• You need a merchant account. If you are going to accept credit card statements, then you need to have a business bank account. If you are operating a retail business, you will need a merchant account to accept point-of-sale payments.
• You operate your business with someone other than your spouse.
• You have applied for an EIN from the IRS. The U.S. Small Business Administration (SBA) highly recommends opening a business bank account the moment you apply for an EIN.
• Your business has employees. You must have an EIN to have employees, so you need to have a business account.
• Your business has multiple transactions a month. You do not want to have to take the time to separate personal and business transactions when under pressure to file your taxes.

What you need to open a business checking account

Whether you're applying for an account online with a digital banking service like Novo or you're going to your nearest financial institution in person, you must have a few things to prove you are who you say you are and that you legitimately own a business.

Each financial institution might be a little different, but most financial institutions require a combination of business and personal details.

Business details

Some basic business account applications will ask for:

• Business name and trade name, or DBA, if you have one. If you are a solopreneur and have no business name, you can use your own name.
• Employer identification number (EIN). If you operate as a sole proprietor or a single-member LLC and do not intend to have any employees, it is possible to open a business bank account at some banks with just your Social Security number (SSN). Otherwise, you will need to provide your EIN and the corresponding document from the IRS. Even if you don't need an EIN, it can be a good idea to have one anyway.
• Business entity type. Corporation, LLC, partnership, or sole proprietor.
• Formation date. Use the date you registered your business with your state or local government business office. If your business is one that does not need registration, use the date you founded your company.
• Type of business and industry. Most small businesses can open a business account with any financial institution. Adult entertainment companies, cannabis, and gambling businesses, however, cannot open a business account with most banks.

Business documentation

The formation of your business determines what business documents you need to set up your business account. While each financial institution may differ a little, here are the common requirements for many business bank accounts for different entity types:

• Corporations. Business license, articles of incorporation, and corporate bylaws.
• LLCs. Business license, articles of incorporation, and LLC operating agreement.
• Partnerships. Business license, business name registration certificate, state certificate of partnership, and partnership agreement.
• Sole proprietorships. Business license and business name registration certificate.

Personal information

Every owner of the business with 25% or more ownership typically must provide personal identification and details. Sole proprietors, of course, need to provide all of the following:

• Birthdate and SSN. Government regulations require financial institutions to use these to verify your identity.
• Personal cellphone number and email address. Used for two-factor authentication. Some online business checking accounts that are mobile-only require just a cellphone number to apply for business banking accounts.
• Government-issued photo identification. Some financial institutions may ask for two types of identification. Whether you need one or two forms, a driver's license or current passport suffices.
• Home address. Most business accounts require a U.S. mailing address. Banks will not accept a P.O. box and need a physical address.

A search on a financial institution's website or a call to its business accounts department will give you all the information you need.

By business structure, you can expect to present:

Sole proprietorships

• Business license or business name filing document, e.g., DBA name
• EIN or SSN

Partnerships

• EIN
• Business name filing document, e.g., DBA form
• Partnership agreement

LLCs

• Articles of organization
• EIN or SSN

Corporations

• Articles of incorporation
• EIN

How to open a business checking account

Before you head online or to the nearest financial institution to open a business bank account, you must do some prep work.

You might be tempted to open a business account at the same bank where you have your personal accounts, but check out other financial institutions, including credit unions, savings and loans, brokerage, and online banks, to find out what might be best for your business. Ask fellow small business owners for recommendations and find out why they chose their own bank or credit union over others.

Features and services to look for in a financial institution for your business bank accounts include:

• Fee structure. Some places charge for checking accounts and overdrafts or have transaction and early termination fees, withdrawal fees, limit monthly transactions, ATM and wire transfer fees, or a monthly service fee. Some also might require a minimum balance, which can act like transaction fees, as your account will incur a fee whenever you go below that minimum. There are, however, free checking account options with minimal fees offered by small business banking providers like Novo.
• Limitations. Are there cash deposit fees or caps on fee-free transactions? Brick-and-mortar banks usually have those types of fees. Online business checking accounts, while convenient with their unlimited transactions, typically do not allow cash deposits or charge a fee, which can be inconvenient. A business account, online or otherwise, may cap certain types of transactions, like mobile deposits, debit card purchases, or ACH transfers. Business savings accounts may also have limits, such as restricting the number of deposits you can have, how you make deposits, and how often you can withdraw funds.
• Perks. Rather than using a personal debit card or credit card for business purchases, you can get a business debit card and credit card, sometimes with a certain percentage of cash back on purchases. Having a business credit card can help your business establish a good credit history. Many financial institutions offer business tools that help you automatically categorize your purchases, pay bills that recur, and accept credit card payments. You need to beware, however, of perks that benefit the banks, like business bank accounts that offer an over-the-top annual percentage yield (APY). Such APYs are great for small business owners. But tack on a $25,000 minimum balance before interest starts to accrue, then, it's not such a great deal. The cash-back offers can also be a bit suspect when you only get cash back when you use your card at select merchants.
• Online and mobile features. In-person banking takes time and can be inconvenient. You will want to have access to online banking, online bill pay, online transfers, and online monitoring of your business accounts through the financial institution's website. You will also want to have the ability to make deposits with your mobile devices.
• Merchant credit card processing. Many customers like to pay their invoices using debit and credit cards. To accept debit and credit card payments, you need merchant services. While you can often find third-party processors who offer merchant services for lower rates than your financial institution, it might be more convenient and efficient to use your bank's service.
• Location. Does the financial institution have at least one location near you? There are times when you need to do in-person banking or need to meet in person with a customer service provider. Having a branch near you makes it easier to have those personal services.
• Fund protection and insurance. The Federal Deposit Insurance Corporation (FDIC) provides traditional and investment banks with insurance for all types of deposits. The National Credit Union Association (NCUA) provides credit unions with the same insurance. Before you sign on with any financial institution and make any deposits, make sure it is insured.

FAQs

Can you transfer funds from your business checking account into your personal bank account?

Not all financial institutions allow you to do this, but if your business accounts and personal accounts are in the same place, it may be possible.

Can you deposit your LLC check into your personal account?

If you are just starting your small business, receiving a check made out to your LLC isn't unusual. You may not have your business account open yet, especially if you are a sole proprietor. If you are a sole proprietor, your financial institution has your DBA on file, and your state rules agree, you may be able to deposit your LLC check into your personal bank account.

What are the pros and cons of depositing a business check into your personal account?

Convenience is the biggest pro for using your personal account for business spending and deposits. If you are operating as a sole proprietorship and are not formally registered with your state, you will not need to set up and manage a fee-bearing account, and you will not need to register your business and proffer the required business documents to open a separate business account.

The biggest cons are the risks that come from mixing your personal funds and business transactions. It is harder to track business funds, and your business just looks less professional when you do not have separate accounts. The Small Business Administration's website also says that you may face possible issues when cashing checks through your personal account.

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