Do You Need a Business Bank Account? | Banking Advice

If you operate a business, you likely need a business bank account. Experts highly recommend opening one to draw a line between your business and personal finances.

But before you open a business bank account, make sure you understand how they work and what features would benefit your situation best.

Generally, a business bank account is geared toward small businesses. In fact, depending on how your business is structured, you might be legally required to open a bank account dedicated solely to your business.

For instance, a limited liability company is required by law to use a business bank account that’s separate from the owner’s personal bank accounts. If you combine business and personal funds, you could lose the LLC’s legal safeguards.

On the other hand, if your business is a sole proprietorship, you’re not legally required to open a bank account just for the business. A sole proprietorship is an unincorporated business owned and operated by one person, with no differentiation between the business and the owner.

A small business should open a business bank account before it begins accepting or spending money, says Gabe Castillo, vice president of Beneficial State Bank.

A business checking account serves as the primary financial hub for most enterprises and is essential for frequent transactions like paying vendors, receiving payments and handling payroll, says Miles Paschini, CEO of FV Bank.

You can usually open a business bank account once you’ve obtained a federal Employer Identification Number from the IRS. You may also need a tax identification number from your state, depending on your business location.

Opening a business bank account makes sense for several reasons.

Setting up a business bank account separate from your personal finances builds a “firewall” between your business funds and personal funds, says Castillo.

“Business clients often prefer to make payments directly to their vendors’ bank accounts rather than pay individual entrepreneurs, as paying directly to the vendors’ bank will leave a paper trail for audit purposes,” Castillo says.

The IRS advises that business owners “keep separate business and personal accounts, as this makes it easier to keep records.”

A business bank account segregates business expenses from personal expenses, making tax preparation and accounting easier, says Rick Kuci, chief operating officer of business funding platform FundKite and former chairman and CEO of Grove Bank & Trust. For instance, it can help more easily identify whether a small business owner took a trip for business or personal purposes, and whether this travel qualifies for a tax write-off.

Your bank likely prohibits personal accounts from being used for business purposes. A bank does this to ensure both it and you are following federal law, and it may close your account if you aren’t using the account correctly, which could disrupt your business.

Furthermore, your personal assets could become entangled in a business lawsuit if they’re mixed with your business assets.

A business bank account boosts the legitimacy of a small business, Kuci says.

“Whether an entrepreneur is applying for funding or trade credit, everyone will want to see how they handle their finances,” Kuci says. “One of the easiest ways to gauge that is by reviewing activity in a business bank account.”

Castillo says a business bank account enables a small business to tap into a number of banking services, such as electronic payments, wire transfers, online bill payments and mobile check deposits. In addition, it might open the door to products such as business credit cards and business loans.

Initially, a small company should simply open a business checking account, Kuci says. But as the business grows, you might want to open an interest-bearing savings account to hold money earmarked for things like taxes, future expansions and emergencies.

Although your business might not need both types of accounts, a savings account “is a useful adjunct to a checking account to build reserves and achieve longer-term financial goals,” Castillo says.

As you’re looking for a place to set up a business checking or savings account, here are some of the questions you should ask:

Here’s what you generally need to open a business bank account, although requirements may vary depending on the business structure: