Should I get a separate business checking account?

You most likely receive income or pay for business-related expenses when you operate a business. Depending on the size and scope of your business, you may be wondering whether you should open a separate bank account for business expenses and income. This situation presents a common question among small business owners, and the answer depends on a few factors. Learn when a business should maintain its own financials as you consider this question: "Should I get a separate business checking account?"

What is a business bank account?

A business bank account is an account with a financial institution that allows a business owner to make transactions. The primary purpose of establishing a business bank account is to separate the finances of a business from the personal finances of the individual who owns and operates it. Even a small business typically has income and expenses, and using a personal account for business income and expenses can make it very difficult to manage and track business-related transactions.

Why does a business need a checking account?

A checking account is a financial account the owner can use to store and spend money. It's different from a savings account in that a checking account typically doesn't have any minimum balance or withdrawal limits. You can make as many withdrawals from the account as needed, and you can generally get a checkbook or debit card to spend money from your business checking account.

If you make business-related purchases, having an easy way to access company funds is a must. Small businesses that make minimal purchases can benefit from a business checking account, especially since many financial institutions offer fee-free and low-cost accounts. Companies that are growing and scaling may also benefit from building relationships with financial institutions, particularly if the need arises in the future for funding or other financial services.

Depending on your business type, you may be legally required to have a separate account to protect your personal assets. Businesses set up as corporations and limited liability companies (LLCs) shield their owners from being held personally responsible for business debt and other liabilities. However, if you can't differentiate between your personal and business assets and debts, the limited liability is at risk, and you might be on the hook when you use a personal checking account as a business account. 

Other reasons to open a separate account include improved expense tracking, audit and tax preparation, and reduced bookkeeping errors. Tracking expenses is more manageable when all the transactions in an account relate to the business. If you get audited or have to pay taxes, you'll need to provide financial records that pertain only to business income and expenditures. Bookkeeping errors are also easier to spot if you review your business account regularly and don't use a personal checking account as a business account.

When should a business start to use a separate business checking account?

"When should I get a separate business checking account?" you may ask. The answer is probably right away. As mentioned, the advantages of having a dedicated account for your business expenses are apparent, regardless of your business size. Opening an account is generally straightforward, especially if your business is small. You can go through the process immediately to open a separate account at the bank you currently use for personal finances and switch all your business financials to the new business checking account.

What type of business checking account should I open?

Now that you know that the time to open a business bank account is now, you may wonder what type of account to choose. Many banks and credit unions offer free checking accounts, and small business owners can typically benefit from financial products that don't take away from their bottom line. A traditional checking account is a great place to start with business finances, and you might choose to use the financial institution you already have a relationship with for personal banking needs to keep it simple. 

Although you don't necessarily have to use a financial institution specializing in business banking, opening a business-specific account and building a relationship with an institution offering access to additional products and services might make sense. This is especially the case for businesses that are growing or already substantial in size. 

How to open a business checking account

If you're ready to take the next step and open an account for your business, follow these steps:

Assess the level of service available

The unique needs of your business will determine what financial institution to use and the type of account to open for company expenses and income. Community-based banks often provide a higher level of local service than national banks, making them better options for smaller businesses and sole proprietorships. However, a company with an aggressive growth strategy might benefit from keeping its funds in an account with a national bank with enhanced capabilities and additional products and services for businesses.

If a need arises with your business bank account, you want to ensure you can resolve it quickly and efficiently. It's wise to research the financial institutions you're considering and read reviews to determine what level of service you can expect.

Compare fees

Some business bank accounts do require the payment of fees, and the fee schedule may depend on how much money your account contains. When comparing accounts, look at fees the financial institutions may assess for cash deposits, wire transfers, foreign transactions and minimum balances. Banks may also issue monthly service fees, so keep an eye out for this requirement to avoid paying more than you have to for a bank account. 

Gather business documents

Before a bank approves you for a business account, representatives will typically need to see documents confirming your company's legitimacy. The documents you need will depend on the financial institution and business you operate, but some might include your business license and business name registration. If you run a partnership, LLC, or corporation, you may also need to supply your partnership documents, LLC elections, certificate of formation, or articles of incorporation.

Additionally, you'll need to show proof of who you are, often with two forms of government-issued identification. Before you head to the bank to set up an account, check to find out what forms of ID are accepted. You can usually use a driver's license, passport, or Social Security card to verify your identity.

Start using the account

With your new business checking account set up, you can start using the features available and enjoying the benefits of simplified financial management. If your business issues checks to vendors, you can order checks through your bank or a third-party vendor. You may also want to request a debit card to make business purchases from the account.

Read more about banking tips and strategies:

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What are the advantages of credit unions?

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