Many beginning home business owners use their personal bank account to do business. However, this can cause a variety of problems, the biggest of which has to do with taxes. If you plan to take business tax deductions, the Internal Revenue Service (IRS) prefers that you have separate business bank account from your personal one to avoid co-mingling of funds. However, the IRS isn't the only reason to keep your business finances separate from your personal finances. It's easier to manage, track and know what's going on in your business if the funds are separate.
Here's what you need to know about why and how to set up a business account for your home business, even if you're a sole proprietor.
Find Out if You Need a Business Account
We've already established that your business should have it's own bank account, however, you might not need to go with the hassle and expense of a business bank account. If you run your business as a sole proprietor, you can simply open another basic account from which to run your business.
If you're a freelancer or running a side-hustle, if you want to take deductions related to your business, such as the home office deduction, or deducting your business expenses, you should also set up a separate account for your work.
Business Banking Options
While a free business checking account isn't as common for business as it is for personal accounts, some banks now offer them. If you want to avoid paying fees, you'll need to shop around to find out which banks offer free accounts for businesses.
A free account may come with limitations and other charges that you'll want to consider when comparing banking options. For example, there might be a limit on the number of transactions you're allowed for "free" and then you'll be charged for checks, withdrawals, and other transactions over the allotted limit.
Many credit unions also offer business checking accounts, typically at lower rates than commercial banks. In some states, you don't have to be an employer or a member of an organization to join. Many offer local or state residents membership to the credit union.
Other Types of Business Accounts
You can also add a business savings account to help you save for bills or expenses such as your estimated taxes. Sometimes, you can earn interest on your savings account.
Once you've established a working relationship with your business bank, you may also want to apply for a credit card in your business name. A business credit card can help when you're short on funds and suddenly need equipment, software or inventory. As you extend your relationship with your business banker you'll have a source to contact in the event your need to borrow money to run or grow your business.
If you have a PayPal account for personal use, you should apply for a second or business PayPal account if you'll be using it to collect payment in your home business.
What You Need to Open an Account
What you'll need to open a business banking account depends much on your business structure and the account you open. As a sole proprietor, usually you'll just need your identification (such as a driver's license), a social security card (not just the number but the card as well), and to fill out any forms required by the bank.
Since an LLC, partnership and other business structures are their own entities, you'll need more paperwork for the bank. In most cases, you'll need your employer identification number (EIN), business structure paperwork (i.e. Articles of Incorporation for LLC), and identification.
The process of opening the account is straightforward. Simply visit your bank with the needed the paperwork, and the bank staff will set up the account. Once it's set up, you'll want to make sure that you use it for all your business transactions such as:
- Setting up direct deposit from your clients, affiliate programs, or payment processor
- Depositing payments from customers or clients
- Paying for goods and services for your business
Consider getting business financial software to help you keep track of your business income and expenses. You can also get business financial phone apps to help you manage business expenses you'll want to track for tax purposes.
More Resources for New Businesses
- 8 Steps to Your Business Identity - Introduction & Overview
- Brainstorming Your Business Name and Tagline
- Address and Phone Numbers for Your Home Business
- Checking into an Employer ID Number with the IRS
- Creating Your Business Logo
- Ordering Your Business Cards
- Creating and Ordering Your Business Stationery
- Establishing Your Business Website