A business bank account opens the door to more flexibility, rewards, and security for your small business. Keeping your personal finances separate from your business bank is really worth the benefits it brings.
A business bank account allows you to separate your business finances from your personal and this can have many benefits on its own. As an LLC owner, you risk losing your limited liability protections if you don’t keep your accounts separate, so once you get your EIN or federal tax ID, make sure to sign up for a business bank account.
Here are 5 key benefits to opening a business bank account for small business owners.
Keep your business and personal finances separate
If you’ve formed an LLC or incorporated your business, it is important to get a business bank account in order to track your expenses for your business. This is key not only for tax season, but also to stay on top of your revenue, profit, and expenses. Get a clear view of your cash flow, and what money is coming in and out of your business. This way, you can track risks and growth for your business and budget accordingly, without having to worry about your personal finances muddying the waters.
If you have employees, it is also important to have a dedicated account to pay them from.
Make filing your business taxes much smoother
Separating your business and personal transactions is not only key for your own small business finances, but is also really important for filing taxes. Once you get your EIN, you should be preparing to file taxes for your business.
An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. An EIN is often required to open a business bank account and is always required to hire employees. A business bank account will make it easier to keep an audit trail for your business expenses.
The IRS expects you to keep close track of your business expenses, and you’ll only benefit from keeping everything in its own dedicated account. You’ll be able to file quickly and smoothly once tax season rolls around, and it is especially important to keep your expense books clean and tidy in case you get audited. Mingling your personal and business expenses is something the IRS frowns upon.
One of the major benefits of getting a business bank account is that they’re often designed specifically for business owners. You can get discounts and rewards that bring more money to your business such as software discounts, cashback specific to common business expenses, and rewards for small businesses.
A personal bank account is targeted to individuals, so the perks are not typically suited for businesses. Save more money to put back into your business with a dedicated business bank account with custom business rewards and discounts.
Protect your limited liability
As the owner of a Limited Liability Company (LLC), opening a business bank account can protect your liability because you won’t be combining business and personal funds. When forming an LLC, the business becomes an entity separate from the owner, so the individuals who own them can’t be held personally responsible for any risks, debts, or suits that the company may face.
There is, however, something called “piercing the veil”, which happens when owners or stakeholders are held personally liable for the company’s debts by the courts. In this case, the owner’s personal assets may be used to pay off the LLC’s debts.
A business bank account will allow you to keep detailed records of important decisions and spend, which will help you adhere to corporate formalities that prevent you from “piercing the veil”. A common mistake that many small businesses make is “commingling assets”, such as business and personal assets, which is legally prohibited as a corporate formality.
If you want to decrease the risk of putting your personal assets at risk in the event of a lawsuit, then you need to adopt some protective measures to keep your assets separate. A business bank account is the best way to ensure this.
Get more credit options and establish your credit
Opening a business bank account is one of the first steps to building credit for your business. It gives you the opportunity to show your bank that you operate your business finances responsibly. Be careful not to overdraw your account or pay out for anything when you may have insufficient funds. Also, don’t forget to make regular deposits and business bill payments from it.
Usually, a business bank account is required to open a business credit file with major business reporting agencies. Business credit reporting agencies use payment information to establish credit history and calculate business credit scores. It may take a little bit of time to build up your credit score for your business, but a dedicated business bank account is your first step.
Once you’ve formed an LLC or incorporated your business, opening a dedicated business bank account is typically the next step for most new business owners. This will open the door to more flexibility, convenience, protection, rewards, and security for your small business. Keeping your personal finances separate from your business bank is really worth the benefits it brings.