Most businesses should open a business checking account at formation or upon earning consistent revenue from a hobby. This allows you to keep accurate records right away. It’s also a way to establish a credible business presence.
You don’t need to earn any revenue to qualify for an account. You only need to provide the corresponding documentation, such as your Social Security number, employer identification number (EIN), and business license, to verify your identity and ownership status. The precise requirements differ by bank and entity type.
In fact, a Square study finds that 63% of small business owners opened at least one business bank account when starting their business. Speaking from personal experience, it’s usually easier to set up your business accounts before accepting your first payment, as switching banking details on various platforms is a hassle.
How Do Business Bank Accounts Work?
Business bank accounts are specifically for conducting business-related transactions. They usually offer business-specific tools like employee controls, business software integrations, invoicing, and tax planning.
However, they also have many features that are also offered on personal accounts, such as debit cards, online bill pay, direct deposit, and FDIC insurance.
There are two primary types of business banking accounts:
- Business checking accounts: These accounts are specifically for daily transactions like receiving revenue and paying bills or employees.
- Business savings accounts: These accounts are to keep cash reserves in an interest-bearing account for long-term savings goals or to build an emergency buffer.
You may also open a merchant account through your bank to accept credit and debit payments instead of using a digital wallet like Square, Stripe, PayPal, or Venmo.
In addition to comparing features, account fees, and ease of access, you may also strive to earn business bank account promotions for a one-time cash bonus after completing specified activities.
✨ Related: How to Open a Business Checking Account
Business Bank Account Advantages
The most compelling reasons to get a business bank account include:
Accurate bookkeeping: You can easily separate your business and personal transactions, which makes it easier to calculate your business revenue and tax-deductible expenses. Separating your finances makes tax return prep easier and provides more financial transparency for LLCs and multi-owner partnerships.
Asset protection: If you’re an LLC or a corporation, having a dedicated business bank account is essential to avoid “piercing the corporate veil.” Mixing your personal and business assets forfeits the legal protection of your personal assets.
Build a business identity: A business checking account is one of the first steps to starting a business. You can pay for expenses with a debit card and checks with your business name and banking details. Business loan lenders also require linking a business bank account to confirm your cash flow and operational history.
Start a banking relationship: You can also start a banking relationship that makes it easier to qualify for business credit cards or loans. This account can also help you get a business credit score through vendor payments reporting to the business credit bureaus.
Business software integrations: Banks may offer unique features and software integrations for business accounts that personal accounts don’t need. These can make bookkeeping easier and allow you to monitor transactions if multiple employees have account access.
Fictitious name: A business account can receive payments under a fictitious name when you’re “doing business as” (DBA).
Have employees: A dedicated business bank account makes running payroll easier, as you can use your EIN for tax-reporting purposes. A separate payroll account ensures your workers get paid, and you can precisely track this expense.
Your bank may require business accounts: If you’re currently using a personal checking account, be sure to read the account agreement to avoid overstepping the boundaries. Your bank may require a business account to conduct a high volume of transactions and certain transaction types.
Can I Use My Personal Bank Account for Business?
A personal checking account is suitable for money-making hobbies, especially if you’re a sole proprietor or independent contractor with minimal revenue or business-related tax deductions. I still recommend using an expense-tracking app or keeping an expense journal to track your monthly business income and spending for stressless tax prep.
In short, you won’t benefit significantly from a business bank account, and the convenience of receiving your paycheck in the same account you use to pay living expenses, invest, and save for the future is more valuable.
Some money-making ideas that only need a personal account include:
- Caregivers and babysitters
- Delivery app jobs
- Online freelancers (i.e., Fiverr, Upwork, Rev)
- Pet sitters
- Tutoring
- Weekend side hustles
Many self-employed and part-time freelancers prefer sticking with personal checking accounts for instant access to direct deposits. This avoids the unnecessary step of paying yourself by transferring take-home pay from the business account to a personal account. If you do this, make sure you are saving money for your quarterly taxes.
Can I Use My Business Bank Account for Personal Use?
Business bank accounts should only be used for work-related expenses to avoid account agreement breaches and to maintain accurate recordkeeping. Personal use can void personal liability protection, which is the primary advantage of becoming an LLC.
Additionally, the bank may close business accounts when it detects excessive personal activity. Similar policies apply to business credit cards.
While it’s an extra step, remain disciplined to transfer funds to your personal accounts when you need to spend money or fund savings goals.
Should I Open a Separate Bank Account for My Business?
LLCs and corporations should open a business bank account upon founding. Most sole proprietors can also benefit from a business checking account to distinguish business assets from personal funds.
Whether or not to open an account differs for independent contractors and online-based freelancers in a low-risk industry or with minimal expenses. The extra administrative burden and potential costs of maintaining business bank accounts are usually not worth it.
For instance, it’s common to make money as a freelancer and receive payment in a personal account for the entire career and pay for periodic expenses with a personal credit card. You still receive year-end tax 1099 tax forms to prepare your income tax returns, but it’s wise to keep an itemized list notating your business expenses, such as processing fees, office supplies, and software subscriptions.
Additionally, business checking accounts can be more likely to charge monthly fees that are challenging to waive if you have a low account balance or don’t conduct many transactions. In this situation, a free checking account can serve your purpose.
What Are the Best Business Bank Accounts?
The best business bank account depends on your monthly transaction volume, industry, and your average ongoing account balance, as service fees and complimentary items vary widely. You must also decide if you want local branch access to make cash deposits or if you prefer a bank for digital nomads.
Below are some small business bank accounts to consider first for nationwide access and free banking options.
Axos Bank
Axos Bank can be an all-in-one platform with premium and free business checking and savings options. Its Basic Business Checking has no monthly fees, minimum balance requirements, free incoming domestic wire transfers, and unlimited domestic ATM fee reimbursements.
Regarding income-producing cash reserves, its Business Premium Savings account can earn a competitive deposit interest rate. There are no minimum deposit or ongoing balance requirements.
Read our Axos Bank review to learn more about its personal and business banking products.
Novo
Novo provides a free business checking account with unlimited transactions, check payments, and automatic categorization. Another perk lets you automatically set aside a percentage of each deposit into designated savings goals.
Its complimentary Novo Boost feature allows you to access your Stripe payments up to 95% sooner. The banking app also offers invoicing and payroll capabilities and can easily integrate with business software.
Read our Novo Business Checking Review for more.
Lili Banking
Lili offers a free banking account that’s a good fit for freelancers and startups. Paid account plans provide interest-bearing accounts, expense management tools, accounting software, and more.
Upgrading to a paid membership can also provide priority customer support and a rewards debit card. Its four monthly plans cost from $0 to $55.
Read our Lili review for more.
FAQs
Do I need a small business bank account?
Business checking accounts are advised for most businesses — especially LLCs and corporations — for tax planning advantages and personal liability protection. Keeping your personal and business transactions separate lets you accurately identify your revenue and expenses. It can also make a tax audit less stressful as you can easily prove what’s business-related and what’s a personal transaction.
You may decide to open one or multiple business accounts. The ideal number depends on the complexity of your finances. You may prefer to have dedicated accounts for separate expense categories like payroll, inventory purchases, and estimated taxes.
Can I use my personal bank account for my small business?
Personal checking accounts are acceptable for some sole proprietors and independent contractors with relatively few expenses as tax prep remains easy. However, you won’t benefit from the personal liability protection available to LLCs.
Further, you can pay for most small business expenses with a personal debit card or rewards credit card, although it becomes easier to overlook deductible transactions.
Can I open a business bank account with my Social Security number?
Sole proprietors can open business banking accounts only with a Social Security number (SSN), although LLCs and corporations must apply with an EIN. However, some financial institutions may require each applicant to have an EIN. The documentation requirements differ slightly by bank or credit union.
Final Thoughts
Most organizations need a business bank account for daily transactions and accurate tax preparation. It also builds credibility and helps create a business history to qualify for more lucrative financial opportunities. With that said, not every sole proprietor or independent contractor benefits from a business account and is just fine sticking with the simplicity of a personal bank account.
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About Josh Patoka
After graduating in $50k with student loans in May 2008 from Virginia Military Institute with a B.A. International Studies and Political Science with a minor in Spanish (he studied abroad in Sevilla, Spain for 3 months), Josh decided to sell his soul for seven years by working in the transportation industry to get out of debt ASAP and focus on doing something else with a better work-life balance.
He is a father of three and has been writing about (almost) everything personal finance since 2015. You can also find him at his own blog Money Buffalo where he shares his personal experience of becoming debt-free (twice) and taking a 50%+ pay cut when he changed careers.
Today, Josh relishes the flexibility of being self-employed and debt-free and encourages others to pursue their dreams. Josh enjoys spending his free time reading books and spending time with his wife and three children.
Opinions expressed here are the author’s alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.
