Do You Need a Business Checking Account?

business checking account
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Keeping track of income and expenses is extremely vital to your business’s goals, tax purposes, and survival. While this oftentimes requires businesses to have business checking accounts, these accounts have been criticized in financial literature for having low interest rates and few features.

So, in the world of gigs and online shopping, do you need a business checking account? 

Small business owners need a business checking account. It separates your personal from your business transactions, which is critical for sound financial management.  A business checking account also simplifies your taxes, legitimizes your business, and prepares you for growth.

In this article, I will explore some vital questions related to this topic, including how a business checking account works, the advantages of keeping a current account, and how to select the ideal account for your business.

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Business Checking Account – An Overview

If you already have a personal checking account, then you already know half of the story. Business checking accounts are in many ways similar to personal checking accounts. 

They allow you to write checks, make deposits and withdrawals, and even withdraw cash.  Both options also provide online banking and overdraft protections.

In a manner of speaking, a business checking account is like a personal checking account for your business. There are, however, three main differences between a business checking account and a personal account.

  • Account setup: Business checking accounts typically require a whole lot more paperwork to set up.
  • Monthly fees: A business account requires higher monthly fees when compared to a personal checking account. They also have set account balance requirements, which are very strict compared to personal checking accounts.
  • Employee debit cards: Business checking accounts may require employee debit cards. Employees can then use these cards to make transactions from the business checking account. 

When starting a new business, you will be forgiven for skipping this step and perhaps save it for a later date. After all, does it really make sense to go through the headache of collecting all the paperwork and footing the additional maintenance costs when you’re not making any money?

Should you just use your personal checking account for your business instead?  To make an informed decision, let’s explore some of the advantages of setting up a business checking account

Advantages of a Business Checking Account

Having a business checking account definitely has its own share of benefits, including the following:

Tax Compliance and Legal Considerations

Having a business checking account is a must-have for tax and legal purposes. By separating your personal and business account, you are better able to account for your personal and business expenses.

This is crucial when computing your tax obligations.  This account also comes in handy from a legal perspective. Because your business is subject to being audited, failure to separate these accounts could see both your business and personal transactions audited. 

A business checking account can be effective at keeping the taxman and the lawman at bay.

Limits Your Personal Liability

Keeping your personal and business transactions separate is also crucial for limiting your liability for business-related debts. Because your customers will pay directly to the business checking account, your personal finances will not be considered when settling your business’ liabilities. 

You risk having your personal finances used to settle your business liabilities if you fail to separate your personal finances from those for your business.

Useful in Accurate Bookkeeping

Tracking your business expenses and income when you have your business and personal transactions in a single account is extremely difficult, even for the most meticulous planner. 

This can be especially problematic if your business has hundreds or even thousands of transactions every month.  To save you the headache of having to sort your expenses and track all the receipts and invoices, you’ll need to open a business checking account.

Remember, you will need to match these invoices and receipts with your checkbook and bank statement. 

Communicates Professionalism

Keeping your personal transactions separate from your business transactions and creating a checking account specifically for your business communicates professionalism.

It also adds credibility to your business.  Needless to say, you will not inspire much confidence in your customers when you have to write business checks from your own personal checking account.

Easier Payment Management and Tracking

Proper management of your expenses is vital to meeting your business's financial needs. A business checking account centralizes your business’ finances, which means not only that you have a specific account to receive payments, but also to meet business financial obligations such as tax returns and payroll. 

The last thing you want is your personal funds leaking into your business expenditure.

Enhances Growth Potential

While you may use your personal checking account in the early days when your business has fewer expenses or receipts, a business checking account becomes more urgent if you’re planning your business to grow.

For instance, having a business checking account is essential to creating lasting relationships with financial institutions and other lenders.

It is also important to create an impression of consistency. These relationships make it easy to access funds to cater to routine business expenditures such as payroll, taxes, etc. 

This can therefore help you in securing credit to grow or expand your business.

Selecting the Right Business Checking Account

There are different types of business checking accounts offered by different banks. Because this can leave you potentially paralyzed by indecision, below are the key factors to look out for when selecting your ideal business checking account. 

  • Convenience. The right business checking account for your business is that which offers you the most convenient or simplest way to bank.
  • Lowest monthly fees. Your ideal business checking account should have the lowest monthly fees relative to the alternatives.
  • Friendly interest rates. The best business checking account is one that gives you a reasonable interest rate on your deposits and low interest rates on overdrafts or loans. 
  • Low entry requirements. Most business checking accounts feature stringent requirements for deposits and minimum balances. Select the one that ideally has no minimum deposits or minimum balances. If you can find such an option, select the one that provides the lowest requirements. 

Quick, convenient cash access. Having quick access to cash is vital to meeting your business’ financial obligations. Select the business checking account that supports the most ATM transactions for convenient cash access.

Access also extends to other factors, such as ATM accessibility and online banking services.

Do I Really Need a Business Checking Account?

You need a business checking account if you own a business. It facilitates better financial management, financial reporting, and tax compliance.  It is also essential for building a strong, trustworthy business image and brand and for promoting business growth. 

Besides supporting key business functions and your small business’s growth, a business checking account can also save you a lot of trouble from auditing, tax compliance issues, and difficulties in meeting key routine obligations such as payroll. 

These issues can be detrimental to your bottom line and even business success. 

Bottom Line

While you can opt to skip creating a business checking account, this can present significant challenges in the future. Trying to separate your personal and business transactions can also be challenging when you decide to open a business checking account somewhere along the road. 

Whether you’re starting a new business or own an existing one, I recommend setting up a business checking account to benefit from all the things I listed in this article.

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