A checking account allows you to easily spend money on various products and services. You can also set up direct deposit to ensure the revenue you receive from employers and clients goes into your checking account. While consumers have to use personal checking accounts instead of business checking accounts, this decision becomes more complicated for business owners.
While a company can operate under a personal checking account, you’ll get better features and perks with a business checking account. However, you’ll have to go through additional steps to create a business checking account instead of relying on a personal account. This guide will explore the pros and cons of each account and what to consider before deciding which one to use.
The Importance of Choosing the Right Checking Account
The bank account you select can impact your company’s growth. Some banks offer additional resources geared toward business owners, while others offer a no-frills banking experience. Furthermore, a business checking account can help companies build business credit, which is important for obtaining business financing. However, some people may only need the more simplified experience that a personal checking account provides.
Overview of Business vs Personal Checking Accounts
Both accounts let you manage your money, make payments with a debit card, and set up money transfers. The main difference between these accounts is who they serve. Personal checking accounts are good for personal expenses, such as gym membership, groceries, and entertainment. Business checking accounts are more suitable for business expenses like software subscriptions, supplies, and wages.
What is a Personal Checking Account?
Most people get started with a personal checking account instead of a business checking account. Here’s what you should know about this account.
Definition and Characteristics
A personal checking account is a low-interest bank account that is optimal for covering personal expenses. You can make an unlimited amount of withdrawals from this account each month.
Common Uses
This account is primarily for personal expenses. You can use a debit card to easily tap into your personal checking account’s balance. Some debit cards have rewards programs that incentivize you to make purchases.
Advantages
- No withdrawal limits
- Easily access your money
- Set up direct deposit to receive money sooner
Disadvantages
- Low APY
- Fees
- Perks vary for each bank
What is a Business Checking Account?
You’ll have to start a business before you can receive a business checking account. If you’re already set up, here’s what you have to know.
Definition and Characteristics
This type of bank account lets you receive revenue and cover expenses. It’s similar to a personal checking account, but one key difference is that a business checking account allows you to build business credit. A higher business credit score can help you qualify for business financing. You can borrow a lot more money with business loans and lines of credit than with personal loans.
Common Uses
Business owners open these accounts to separate their personal finances from their business finances. These accounts help with day-to-day business expenses and make it easier to separate your personal and business finances during the tax season.
Advantages
- Some business checking accounts offer free tools and discounts through numerous business partners
- It’s easier to file taxes if you separate personal and business finances
- Build business credit
Disadvantages
- You need an EIN to open an account
- Low APY
- Fees
What’s the Difference Between Personal Checking and Business Checking?
Although personal and business checking accounts have foundational similarities, it’s important to note some key differences.
Legal and Regulatory Considerations
A business checking account lets you separate your personal assets and business assets. If your company gets sued and you have a business checking account, your personal assets are safe. However, if your company gets sued and you only have a personal checking account, your personal assets are not safe.
Account Features and Services
Business checking accounts usually have more account features and services than checking accounts. Many business partners with banks offer better deals for people who open business checking accounts.
Fees and Costs
Both accounts have fees, but business checking accounts can end up with higher fees. Monthly maintenance fees may be higher for a business checking account, and you may need a higher minimum balance to waive the fee.
Transaction Limits
Many business checking accounts have transaction limits in place. If you exceed the limit before the end of the month, you will have to pay a fee for each additional transaction. Businesses may have to upgrade their bank accounts to avoid transaction fees or make them less likely to occur.
Payment Flexibility
Both accounts offer payment flexibility. Most personal and business checking accounts give you ways to waive the monthly maintenance fee. You can readily access your cash and use it for purchases at any time.
Tax Implications
Business checking accounts make it easier to file taxes since they separate personal transactions from business transactions. If you do all of your business from a personal checking account, you will have to browse through more transactions to determine which ones can help you save money during the tax season.
Record Keeping and Accountability
It’s easier to keep records if you have a business checking account than if you have a personal checking account. Accountability is also easier to enforce and monitor, especially if you have multiple employees using your company’s business credit cards.
Benefits of Keeping Business and Personal Finances Separate
Opening a business checking account takes additional time and effort, but it’s worth it in the long run. One key perk is that you keep business and personal finances separate. Here’s why that’s a big deal.
Simplified Bookkeeping and Reporting
Keeping your accounts separate simplifies bookkeeping and tax reporting. When you look at transactions in a business checking account, you know they are for business. For a personal checking account, you have to review each transaction more carefully to ensure you don’t mix up personal and business expenses.
Easier Tax Filing
You will save a lot of time with tax filing if you separate your business and personal finances. You can also save money as well.
Improved Professionalism
People will take your company more seriously if you have a business checking account. This bank account demonstrates that your company is full-time work instead of a hobby or a small side hustle.
Legal Protection
Your personal assets are safe if your company gets sued and you have a business checking account. However, no personal asset is safe if you do all of your business with a personal checking account.
Can You Use a Personal Checking Account for Business Purposes?
It’s possible to use a personal checking account for business purposes. These are some scenarios where it may make sense to use a personal account instead of a business account.
Sole Proprietorships and Small Freelancers
These individuals can use personal checking accounts instead of going through the hassle of creating a business checking account. They don’t have to pay employees and can use their personal money for business expenses.
Low Transaction Volume
A personal checking account is also optimal if you have a low transaction volume. Having fewer transactions will make it easier to distinguish personal and business transactions when it’s time to file taxes.
Potential Risks and Drawbacks
Using a personal checking account gives you fewer resources that you can use to grow your business. It also creates the risk of losing personal assets if your company is involved in a legal dispute. Furthermore, it will take longer to file taxes, and your business won’t look professional without a business checking account.
Transitioning from a Personal to a Business Checking Account
Many businesses get started with personal checking accounts, but it may eventually be time for a switch. Here’s how to tell if you should use a business checking account and how to get started.
Identifying Signs That It’s Time to Switch
These are some of the signs that it may be a good time to switch to a business checking account:
- You may need to borrow more money for your business
- Taxes are getting more complex
- Your business continues to grow at a fast rate
- You want more business tools and resources for your company
- You don’t want to get blindsided by a legal dispute
- You want to look more professional
- You want access to better rewards programs
Steps to Open a Business Checking Account
You will need an EIN to open a business checking account. Once you have that number, you can follow these steps:
- Step 1: Compare business checking accounts
- Step 2: Gather the necessary documents (EIN, ID, your company’s address, the name of the account holder, proof of business, and other requirements if applicable.)
- Step 3: Apply for a business checking account
- Step 4: Fund the account
Tips for a Smooth Transition
A smooth transition will help you minimize hiccups while capitalizing on the advantages of having a business checking account. These tips can help to streamline the process:
- Notify clients and business partners about the change
- Set up automatic payments for recurring transactions
- Regularly review account activity
- Take action quickly so the transition doesn’t feel like a long slog
Conclusion: Choosing the Right Checking Account for You
The right checking account can make it easier to manage your business, reach new customers, and stay on top of your finances. While a personal checking account is a good starting point for most people, you may eventually need to upgrade to a business checking account. Comparing business checking accounts based on their rates, partners, fees, and other details can help you decide the right account for your company.
