When you start a new business, one of the first things on your to-do list is to open a business bank account to keep your business and personal finances separate. It’s a good idea for any small business owner, and depending on the type of business you register, it may even be a requirement.
If you’re not convinced now, we hope to change your mind after you read this article. Relay is an online business banking and money management platform with a focus on helping small businesses better understand their finances. In this article, we’ll dive into the key differences between a business vs. personal account, and why you shouldn’t run a business without a business bank account.
In this article:
What's the difference between a business bank account and a personal bank account?
The main difference between business and personal bank accounts, as the name suggests, is that business bank accounts are used to manage business transactions while personal bank accounts are for personal expenses.
Business bank accounts should be used to pay suppliers and employees, deposit payments from customers, make purchases for your business, and make business tax payments.
Personal bank accounts should be used only for managing your personal finances, which usually include depositing your paychecks, paying household bills, and making personal purchases.
With a business banking platform like Relay, you can create multiple checking accounts and issue debit cards with spend controls — all without account fees, maintenance fees or minimum balance requirements. Plus, you gain access to integrations that will help you manage payroll, bookkeeping, and accounts payable.
Can I use my personal checking account for my small business?
The short answer is maybe. But, it depends on your business license. When you start a new business, you can choose to register as a sole proprietor, a limited liability corporation (LLC), a general partnership or a corporation.
If your business is set up as a separate legal entity, such as an LLC or a corporation, or you are planning to in the future, your LLC or corporation must have its own business bank account because they are separate legal entities. One of the biggest benefits of separate legal entities is limited liability protection, which protects your personal assets from bankruptcy. But to have this limited liability protection, you need to keep business funds separate.
Banking Built for Business Owners
No account fees or minimums; 20 checking accounts; 2 savings accounts with 1.00%-3.00% APY; 50 virtual + physical debit cards. Open account 100% online.
Learn moreIf you are a sole proprietorship, you're not required by law to have a business bank account, and you technically could use your bank account for both business and personal transactions, or set up a second personal account. But even though you're not required to have a business bank account as a sole proprietor, you should still get one. In fact, the IRS recommends it in order to “make it easier to keep records”.
Why your small business should separate business and personal finances
Whether it's required by law or not, it is a good idea for most businesses to separate their business and personal finances. Here are 7 reasons why.👇
1. You get better legal protection and limit your personal liability
When you set up an LLC or a corporation, one of the primary benefits is legal protection, which protects your personal assets and funds from claims against your business.
When your personal and business finances are combined, it can be harder to prove what belongs to which entity. Not to mention, when your business income gets deposited into your personal account each month, you have to review and separate out all business transactions for your records. Having a separate business bank account is key in this situation (and legally required in order to limit personal liability) to protect your business and yourself from financial liability.
💡 Read more on this topic: Can I use my business debit card for personal expenses?
2. You provide credibility for your business
A dedicated business account makes you look more professional. For example, if you own a business called "Flywheel Marketing," and your emails, LinkedIn account, and website all say "Flywheel Marketing"; your business name should be on your bank account too. When your clients pay you, it looks more professional and trustworthy when your bank account is also under the name "Flywheel Marketing," as opposed to your personal name.
On the other hand, if you use your personal bank account for business, the payment issued will come from your name, not your business. You end up making your business seem less legit.
3. You can budget with multiple checking accounts
Some business banks will allow you to open multiple checking accounts for better cash flow management. And since cash flow problems are the #1 reason businesses fail, choosing a business bank account that allows you to have multiple free accounts sets you up for success.
If you’re familiar with the digital envelope system or multiple bank account budgeting, then you’ll want this functionality. With Relay, you can open up to 20 free checking accounts (which you can use like sub-accounts) to further divide and organize your cash. This way, you won’t need to stress about co-mingling personal funds with business funds, and you have plenty of checking accounts for all your business budgeting needs.
💡 Read more: How many business checking accounts should I have?
4. You simplify accounting workflows
When you co-mingle your personal and business expenses, you waste a lot of time sorting out which transactions are personal and which are business expenses. If you are not diligently tracking what is business vs personal, it becomes increasingly difficult to sort your expenses come tax season. Were those office supplies for your business or your kid's school project? It's hard to remember and decipher after the fact.
Anytime you are manually sorting your business expenses from your personal, you create room for errors and potential for inaccurate bookkeeping. As your business processes more transactions, sorting out expenses becomes increasingly difficult. And if you don’t believe us, just ask your accountant or bookkeeper — some will actually insist you separate your personal and business expenses before they agree to work with you.
A business bank account comes with integrations that make your life easier as a business owner. For example, you're never going to get an integration with QuickBooks Online, Xero, or Gusto with a personal bank account. With Relay, you don’t just get a business bank account, you get a full suite of money management features to help your business see exactly what you’re earning, spending, and saving. Relay makes accounting straightforward thanks to detailed banking data that directly and reliably syncs into QuickBooks Online and Xero.
Likewise, few (if any) personal accounts will have features like enriched data or the ability to manage multiple entities from one login. After all, there are no "entities" to manage. A business simply has different workflow needs, so it's about software as much as it is about financial services.
Banking Built for Business Owners
No account fees or minimums; 20 checking accounts; 2 savings accounts with 1.00%-3.00% APY; 50 virtual + physical debit cards. Open account 100% online.
Learn more5. You can collaborate with team members
Some business bank accounts will include features like multiple user roles to help teams collaborate on finances. Even if you are the sole employee of your business right now, you may want to hire other team members as your business grows. Those employees may eventually need access to your business bank account to pay bills, make purchases, or process payroll on behalf of the company. As a business owner, you'll need to give your employees access to business funds in order to do so. The same applies if you are working with accountants, bookkeepers, or financial advisors.
If other people are involved, you won't want them going through or dealing with your personal finances, so a separate business bank account is needed. Ultimately your accounting workflow is going to be more efficient with a business account.
6. You'll want it for business credit or lending
If you ever want to apply for a business credit card, line of credit, or small business loan in the future, having an established business bank account is the foundation for building a business credit history. Of course, having one doesn’t actually build credit history, but it is a key factor that lenders review.
Your credit history determines your credit score and how much money your business may be able to borrow. A good credit score will allow you to borrow more and potentially qualify for better interest rates on loans.
When you have a separate business account, your credit approval won’t rely on your personal credit rating only. Plus, if you ever need a business loan, you can’t get one without a business bank account anyway, so it’s best to start right from the beginning.
Banking Built for Business Owners
No account fees or minimums; 20 checking accounts; 2 savings accounts with 1.00%-3.00% APY; 50 virtual + physical debit cards. Open account 100% online.
Learn more7. You’ll have a clean audit trail from day one
One of the greatest fears of any business owner is getting audited by the IRS. If this happens, you may be asked to submit years worth of financial information to ensure tax compliance.
While having a separate business checking account won’t prevent you from getting audited, it will help you during the audit process. If you're ever audited, not keeping your business finances separate may be a red flag for the IRS. They may disallow expenses and include deposits because they cannot prove what is business and what is personal.
Think about it, when you co-mingle your personal and business expenses, come tax season, you will need to sort out which transaction is personal and which is business. When you keep separate your business and personal taxes from day one, you know there’s no co-mingling of personal and business money.
Relay is banking built for small business owners
Your personal bank account has served you just fine, but now it's time to make your life easier by choosing a business bank account.
If you're ready to open a new business banking account, Relay is FDIC-insured through our partner bank Thread Bank.
With Relay, you can spend, save, and plan more efficiently and get unparalleled clarity into operating expenses, cash flow, and accounts payable. If you’re looking for a new business checking account, make the switch to Relay today.
