June 16, 2021 en_US Getting your first payments as a small business owner is rewarding. But, after you celebrate those hard-won sales, you’re bound to have this questio... https://quickbooks.intuit.com/cas/dam/IMAGE/A7xV5cycj/business-banking-hero.jpg https://quickbooks.intuit.com/r/banking/personal-vs-business-bank-account/ Personal banking vs. business banking: Do you need separate bank accounts?

Personal banking vs. business banking: Do you need separate bank accounts?

By Kat Boogaard June 16, 2021

Getting your first payments as a small business owner is rewarding. But, after you celebrate those hard-won sales, you’re bound to have this question: Where should that money go? 

Can you put it in your personal account? Do you need to have a separate business account? What are the rules here?

Keeping your personal and business finances separate is a smart idea to maintain accurate records, understand your business’ financial health, and make informed decisions. Even further, those separate accounts might not just be a recommendation—depending on your business, they could be a requirement.

Use these links to jump to a specific section, or keep reading to learn more about business banking.

What’s the difference between personal and business bank accounts?

The difference between these two types of accounts is pretty straightforward. Here’s the gist:

  • Business bank account: Holds and manages the money made within a business
  • Personal bank account: Holds and manages your personal funds

A business bank account typically includes a business checking account and a business savings account.

Let’s start with the business checking account. The checking account allows you to write and deposit checks, transfer money electronically, and use a business card.

How much does a business checking account cost? It depends. Common account and service fees include maintenance fees, transaction fees, ATM fees, and deposit fees. Some banks may offer free small business checking accounts for new businesses. However, free accounts may come with tighter restrictions. Weigh your options carefully to find a business checking account that works for your business.

A business savings account helps you separate savings from working capital and earn interest on the funds you set aside. Some savings accounts may require a minimum deposit. Others come with balance requirements and monthly fees. Look for a business savings account with low fees and FDIC insurance.

Even if you have a perfectly good personal bank account, it’s important to open a dedicated bank account for your business—particularly if you have an established business entity like an LLC or corporation. A dedicated business bank account:

  • Safeguards your business funds by separating your personal finances
  • Makes it easier to monitor your business spending and create more realistic budgets
  • Promotes better bookkeeping habits that keep your business finances organized
  • Helps you get a business line of credit or a business credit card when you need one

In short, even if a separate account isn’t required for your business, it’s still a good idea to get one.

Can I use the same bank for personal and business banking?

Yes. When choosing a bank for your business bank account, it’s recommended to start with the financial institutions you already know and like.

If you have a personal bank account in good standing, you may get a better deal on a business bank account at the same bank.

Can I use my personal account for business expenses or my business account for personal expenses?

No, you should not use your personal bank account for business purposes. Nor should you use your business account for personal expenses.

The entire point of having the dedicated accounts is to keep those finances separate and avoid legal issues or problems with recordkeeping.

Can I use my personal checking account if I own a corporation or LLC?

No. If you’re registered as an LLC or corporation, you’re required to have a separate bank account for business finances. You should open a bank account under your business name as soon as you start handling business transactions.

Can I use my personal bank account as a sole proprietor?

You’re not required to have a separate bank account as a sole proprietorship, but separate accounts are still a smart idea. A dedicated business account can help you separate business and personal expenses and manage your business finances more easily.

How much money do I need to make before I can open a business bank account?

You do not need to generate revenue to open a business bank account, but you’ll probably want to open a business bank account as soon as you start handling business transactions.

While there isn’t an earning threshold that qualifies you to open a separate account, some accounts may have a minimum initial deposit to open the account and require you to maintain a minimum balance. So be sure to review the terms and account fees of the accounts you’re considering.

More ways to take your business finances to the next level

Opening a dedicated business bank account is a small step that makes a big difference in how you manage your business finances.

It makes it easy to pull financial reports, prepare taxes, and generate financial statements. Those reports give you the information you need to assess your business’ financial health and make data-driven decisions.

Here are five more ways to elevate how you manage your business finances.

1. Understand your financial priorities (and find the tools to support them)

Current and future small business owners agree that managing expenses, getting paid, and setting prices should be top priorities, according to a 2020 QuickBooks survey.

Focusing on these elements early on can set your business on the fast track to financial success. This includes opening a business bank account, focusing on accurate invoicing, and building a scalable pricing structure.

Additionally, the survey asked which financial systems new business owners should invest in first. Current small business owners recommend expense tracking and invoicing software. After all, cash flow problems are a top 3 cause of stress for 76% of small business owners who experience them, according to a 2021 QuickBooks survey. Mitigate cash flow struggles with clear expense tracking and billing tools that do the heavy lifting for you.

2. Set up financial and accounting systems properly

You’re most likely to need help setting up your financial systems correctly when you’re just starting out, according to the 2020 survey. And yet, 38% of prospective business owners say they intend to set up their own financial and accounting systems.

Correcting mistakes or fixing a broken financial system only gets harder down the road. So, do your due diligence upfront (and get help if you need it). Open a business bank account, invest in accounting software, and manage business expenses to get some peace of mind—and avoid headaches later.

3. Maintain accurate records

The next generation of small business owners is more focused on finding the money their business needs than previous generations, according to the 2020 survey. More than one in three of these new small business owners identified “securing finding” as a business priority.

Borrowers hoping to secure small business loans or grants typically need a strong credit score and high cash flow. In most cases, lenders will ask to see a borrower’s balance sheets, income statements, business bank statements, or financial projections.

Without a strong financial recordkeeping system, it may be more difficult to provide the necessary documents and secure funding. A dedicated business bank account, paired with accounting software, can make it easier to track business funds and generate accurate financial statements.

4. Get a handle on cash flow and plan ahead

Even profitable businesses can run into cash flow problems. More than three in five small businesses have experienced a cash flow issue at some point in their history, according to the 2019 survey. Many of them were not prepared to struggle with cash flow, and nearly half say the problems surprised them.

Fortunately, there are a few things you can do to manage cash flow effectively and plan ahead:

  • Build a rainy-day fund. The advice to “save for a rainy day,” still holds true today—especially as a business owner. No matter what challenges your business encounters, a business savings account can help mitigate a negative cash flow. Three to six months’ worth of expenses can help you if your business falls behind.
  • Make collecting receivables a priority. U.S. business owners have an average of $90,000 in outstanding receivables. Encourage customers to pay invoices faster by offering early payment incentives to keep money flowing in.
  • Keep tabs on cash flow. Knowledge is power. Track cash inflows and outflows consistently, and regularly generate cash flow projections to avoid unhappy surprises.

5. Set healthy savings habits

Let’s expand on the “rainy-day fund” a little more. A business savings account means:

  • You’ll be better prepared for emergencies or cash flow challenges
  • You’ll earn interest on the funds you save
  • Your business can be healthier financially, which lenders may notice

But building a business savings of three to six months’ worth of expenses can be intimidating, especially when you’re just getting started.

Closely monitoring your business spending can help. When you can see where you spend every penny, you’re less likely to indulge in unhealthy spending or unnecessary startup costs. Do your bookkeeping weekly so that you always have the most up-to-date information about your finances. Finally, prioritize your savings before you deduct other expenses. Building a savings account takes time and budgeting, but you’ll be glad to have it.

Put your money where it belongs

Once your business starts receiving payments, you need to figure out where to put that money. For the vast majority of business owners, a separate business checking and savings account is a smart step.

Not only does it help from an accounting and recordkeeping perspective, but it’s also one more way to bring legitimacy to your business.

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Kat Boogaard is a freelance writer specializing in career, self-development, and entrepreneurship topics. Her work has been published by outlets including Forbes, Fast Company, Business Insider, TIME, Inc., Mashable, and The Muse. Read more