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Many consumer financial tools are available to business owners.
Checking accounts is one of those things. Here’s what you need to know about each type of account before opening up one at your local bank.
What Is a Business Checking Account?
A business checking account is an account designed specifically for business activity. This might entail spending on products required for business or paying for professional services. It bears a great resemblance to its personal checking counterpart.
With a business checking account, you can still make transfers, write checks, and use a debit card.
The process of opening your own business checking account is quite similar as well. You’ll need your basic identification documents like your SSN and your government ID. You’ll also need your business license, DBA, organizing documents, or partnership agreements.
Of course, a business checking account will be used by multiple people in your organization as well.
Unless you’re a sole proprietor, one of the major perks of a business checking account is sharing tools with various employees.
This allows them to easily spend on what they need to run their department. It also gives you full control and oversight over their spending at all times.
Put simply, a business checking account allows you to spend money on business expenses. If you plan on running a business, you’ll absolutely need one.
What Is a Personal Checking Account?
A personal checking account is designed to support everyday personal spending needs.
Unless you currently don’t have a bank account, you should be familiar with personal checking.
Personal checking accounts allow you to store and transfer your personal funds. You also have access to tools like your own debit card and checks as well.
There are multiple types of personal checking accounts in this day and age. For some, opening an account at a nearby bank may best suit their needs. Meanwhile, others may go the completely online route.
This allows them to access their money wherever they may be. It may also allow them to tap into specific perks like fewer fees or rewards for opening a strictly online account.
Overall, consumers have a lot of options when it comes to personal checking accounts. Having a personal checking account is a must. But does the same apply to a business checking account? Are the two as important, especially if you’re a business owner? How do they differ?
Let’s take a closer look at some of the ways that business and personal checking accounts aren’t the same.
What’s the Difference Between Business and Personal Checking?
So, what are the key differences between business and personal checking? Here are some of the most important differences to know.
- Fees and Fee Waiving. Personal checking accounts may have fees. But reaching the threshold needed to be exempt from those generally isn’t too difficult. Business checking accounts, on the other hand, generally have higher fees. Additionally, getting out of those can require having more money to reach the exemption threshold.
- Legal Protections. Sole proprietors may operate without a business checking account. The problem? If there’s an issue within the business, they’re on the hook financially. A business checking account helps you separate your finances so you’re not liable should something occur.
- More Perks and Tools. Personal checking accounts are by no means lacking in terms of tools. However, more is often offered to you with a business checking account. This can include things like a line of credit. Keeping track of your Corporate Credit is important. You may even get financial advisory services or payroll services. Put simply, business checking accounts are built for your specific needs.
- Spending Money. The funds in your personal checking account can be used for anything. But a business checking account is strictly for business purposes. You cannot use your business funds for any purchases that aren’t necessary for your business.
Business checking accounts often have more stringent terms and conditions. However, they also tend to offer more tools to help you run your business. Consider all of these if you’re thinking about opening up your own business checking account.
Why You Need A Business Checking Account
There are multiple reasons why you should have a business checking account as a business owner. This applies especially to those who are deciding to form an LLC or a corporation.
More Accurate Accounting
Staying on top of your finances is of the utmost importance.
If you have your business finances becoming muddled up with your personal funds, accounting becomes much harder.
This can prevent you from knowing just how well your business is performing. It can also deny you from receiving insights into future business performance so you can plan accordingly.
When you have all of your funds flowing through one account, you know how much money you’re receiving and how much you’re spending.
If you plan on doing your own accounting, this makes your life easier. If you plan on handing it off to someone else, it will be greatly appreciated by them instead.
Streamlined Tax Reporting
Tax season is rarely embraced with open arms. But it can become even more of a problem if you’re not equipped to handle it.
The better you keep tabs on your finances, the easier it becomes to report your taxes with confidence.
This is one of the main benefits of a business checking account as it limits your financial activity to one place. You can also end the headache of figuring out which transactions were business-related or personal.
In the development of an audit, you won’t have to worry about scrambling to get all of your financial paperwork together.
Many of us go to extensive lengths to protect our finances. So, why wouldn’t you opt for a business checking account if this is your goal?
As discussed above, blending finances together can put you in a precarious financial position. If you’re a victim of debt or fraud, you can end up losing personal funds you might not get back.
If a legal development strikes your business, you could be liable without the right protections. Establishing an LLC at the least and opening up a business checking account can afford you greater safety.
If the other reasons aren’t enough to convince you, this should prompt you to open up a separate account!
Thinking of the future of your business is something that’s on your mind from the moment you start it.
You want to have everything in order from the moment you start operating. Part of this should be opening up a business checking account.
A business checking account makes your business more legitimate and furthers your brand. It can also inspire client confidence when they’re sending money to an established business checking account.
In business, appearances are everything. Why not make your business appear legitimate with a dedicated business checking account?
Business checking accounts and personal checking accounts function similarly. However, there are notable differences to consider if you’re a business owner.
Brush up on your business checking and personal checking knowledge in the guide above.
Can I Use My Business Checking for Personal Use?
You shouldn’t spend money from your business checking account on personal purchases.
We talked about this a bit above. However, there’s a list of reasons why it’s advised against. Let’s take a look at why using business funds for personal reasons is never a good idea.
• It eliminates the accounting and tax benefits of opening a business account. The more you spend personally, the harder it becomes to categorize your transactions. If you’re trying to stay on top of your business finances, never spend business funds for personal reasons.
• It can put you in legal trouble. If you’re spending money for personal reasons, it erodes the protections offered by business accounts. This puts not only your business at risk but your personal finances as well.
• It can look like illegal activity. Unless you’re the sole owner of a business, there are others using your funds. If you’re spending funds for personal reasons, it could look like embezzlement. This can put you in even further legal trouble down the road.
What Are the Benefits of Business Checking?
Business checking accounts offer a wide range of benefits personal accounts don’t. This begins with the wide range of tools and services made available for business owners. However, business accounts can also make accounting and tax reporting easier.
While there are some downsides like higher fees, the benefits far outweigh the disadvantages.
Is It Better To Have A Business Account or a Personal Account?
So, which is better when considering business checking and personal checking?
The answer truly depends on your business activity.
If you own a business then a business account is a good idea to have. But if you do not then sticking with a personal account is great too.
Consider your own needs and situation when weighing the two types of accounts.
Dylan Buckley is a freelance finance writer and editor with 7 years of professional experience. Specializing in personal finance, cryptocurrency investments, and Fintech, Dylan is deeply passionate about creating content that helps readers make informed, confident financial decisions. He studied finance in college and maintains a credit score over 780.