Can I Use a Personal Bank Account for My Small Business?

Can I Use a Personal Bank Account for My Small Business?

You may be able to use a personal bank account for your business if it is a sole proprietorship. In a sole proprietorship, you and your business are legally one and the same. If you don't incorporate or form another type of legal business entity, and you are the sole owner, your business is considered a sole proprietorship by default.

A corporation or limited liability company (LLC), however, is a legal entity separate from its owner. That entity needs its own bank account to maintain legal separation between owner and business, protecting the owner from legal liability.

What's the Difference Between a Personal and Business Bank Account?

There are some important differences between a personal bank account and a business bank account. Be sure you understand them before opening your new business account.

• Business bank accounts typically require higher minimum balances to avoid maintenance fees. You may also need to make a minimum initial deposit to open the account. Look for an account with minimums you can meet.
• Business bank accounts may allow you to get debit cards for your employees so they can make purchases and deposits or withdraw cash at ATMs.
• Banks may limit the number of transactions or transfers you can have per month. Some business bank accounts even limit how much money you can deposit. Choose a bank whose limits make sense for your business's projected sales.
• Business checking accounts may enable you to take credit card payments using what is known as a merchant account.
• Business bank accounts often come with additional services to help you run your business. For instance, you might get access to business specialists, scanners you can use to deposit large amounts of checks remotely, or free wire transfers.

Should you use the same bank for your business as for your personal bank account? It's a good idea to start your search by finding out what your current bank has to offer to business customers. Having both accounts at the same bank can make it easier to transfer funds when it's time to pay yourself. But be sure to shop around before making your decision.

Why You Should Open a Business Bank Account

Using a personal bank account may seem like a simple solution when starting a business, but in the long run it could cause major problems—even for a sole proprietor. Good reasons to open and use a business bank account instead of using your personal account include:

• It looks more professional. Customers and suppliers may think less of your business if you pay bills from your personal account or ask customers to pay you directly. Can they trust that you'll be around for the long haul if you haven't bothered to set up a business bank account?
• It builds business credit. Suppliers and lenders use business credit reports to make decisions about lending your business money, approving you for a business credit card or extending trade credit. Although they may look at your personal credit score too—especially in the early years of your business—building a credit history for your business can open new doors.
• It simplifies record-keeping, financial management and tax preparation. Imagine the headache of sorting through your personal checking account transactions at tax time to determine which were for business and which were personal. When your money is combined in the same account, it's easy to make a potentially costly mistake, such as miscalculating your taxes. When you share your account with family members, things can get even more confusing. What if your spouse unwittingly spends the money you were planning to use for payroll?

One of nine factors the IRS considers in determining whether your business is truly a business, or just a hobby, is "whether you maintain accurate books and records." Commingling business and personal funds in one account can make it harder to prove your business is legitimate. The IRS may disallow your tax deductions or even audit you.

• It helps you track your business performance. Accounting software for small businesses typically links with your business bank account, pulling real-time data from your bank. However, this won't work if your business funds are in your personal account. With a business bank account, you can see your cash flow at a glance, quickly create financial projections and easily keep track of how your business is doing.
• It protects you from liability. Forming an LLC or corporation protects your personal assets from liability related to your business. However, certain actions can "pierce the corporate veil" and remove those protections, putting your personal assets at risk. Commingling business and personal funds, such as making business purchases from your personal bank account, is one of those actions; it reveals that you aren't treating your business as a separate entity.

What You Need to Open a Business Checking Account

Opening a business checking account requires more documentation than opening a personal bank account. Some banks allow you to open an account online, but most require you to visit the bank in person. Anyone you want to have access to the account, such as your business partners or a key employee, must generally be present as well.

The exact documents you need to open an account may vary depending on your legal form of business and the specific bank, but typically you'll need:

• Personal identification, such as a driver's license or passport
• An Employer Identification Number (EIN), also called a Federal Tax Identification Number (TIN). If you're a sole proprietor, your Social Security number can serve as your TIN. If not, you can apply for an EIN online and get it immediately.
• Your business license
• Your assumed name certificate (if you have filed a fictitious business name, also called a DBA or "doing business as," with your state's secretary of state)
• Organizing documents for your business entity, such as articles of incorporation or articles of organization
• Operating agreement, partnership agreement or corporate bylaws (depending on your form of business)

All business documents should include your business name, your name and the names of any co-owners.

If you plan to open a merchant account to accept credit card payments, the bank may ask for an estimate of your monthly payment card sales.

The Bottom Line

No matter what form of business you own, using a personal bank account for business expenses can make accounting more complicated, get you in hot water with the IRS and even put your personal assets at risk if someone sues your business. Protect yourself from these risks by opening a business bank account.

Opening a business bank account is also a first step toward establishing a business credit history, which can help you qualify for small business credit cards, trade credit and even business loans. Do you know your small business credit score? You can get a free credit report for your business at Experian.