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If you are starting your own business, the IRS recommends getting a separate checking account specifically for managing business finances. But do you need to open a business checking account, or can you open a secondary checking account, instead?
We'll explain the differences between business checking accounts and personal checking accounts so you can better understand your options and which next step to take in your business.
Business checking vs. personal checking: At a glance
Business checking accounts and personal checking accounts have two major distinctions: these accounts have different features and opening requirements.
- A business checking account is specifically geared toward business owners. As a result, it may offer a greater sense of protection and professionalism for people managing business expenses.
- A personal checking account is used for everyday finances. While it may be easier to set up and open than a business checking account, you generally won't have access to many business features.
What is a business checking account?
Business checking accounts are designed for business owners and are available at brick-and-mortar and online financial institutions.
You will need business documentation to open up a business checking account online or at a branch. For example, if you have a partnership or corporation, you'll need to have your employer identification number (EIN), business license, and any important business documents that specify partnerships, business, and operations agreements. Like with a personal checking account, you'll need to bring two forms of government-issued IDs and proof of address to verify your identity.
When you open a business checking account, you'll have access to additional business banking features at financial institutions. Many banks offer merchant services, which allow you to accept credit cards, debit cards, or mobile payments as payment methods. You'll also be able to apply for a business line of credit, which could be worth exploring if you have an emergency and want to keep your personal finances separate from your business.
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When would you open a business checking account?
A business checking account will be a better option if you plan to use other business banking services offered at financial institutions.
"Business accounts do offer benefits that aren't available to regular checking accounts that could be tied to merchant services. There's also additional liability protection separating your funds," says Marguerita Cheng, CFP® professional, RICP, and chief executive officer at Blue Ocean Global Wealth.
For example, banks may offer merchant fraud protection tools for your business and customers when you have a business checking account.
Jeb Jarrell, CFP® professional and owner of Plentiful Wealth, LLC, also notes a business checking account allows you to look more professional when you're competing for a client or operation; it shows other business owners that you are a legitimate business operation.
What is a personal checking account?
A personal checking account is a type of bank account that anyone can open to manage their expenses.
Personal checking accounts can be opened online or at a branch and don't require as much documentation as business checking accounts. You'll usually need a US ID, a social security number, and a professional address. If you do not have a social security number or US ID, some banks will allow you to use a foreign ID instead.
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When would you open a personal checking account?
Cheng says if your business is a sole proprietorship, you might open a personal checking account instead of a business checking account as long as you keep your finances separate and distinct.
"If your business is growing, you can open a secondary checking account," adds Cheng. "Then, as your business grows, you can upgrade and get additional customer features. That way, you're not commingling your money, but you're not setting all these bells and whistles."
Bear in mind if your business is a separate entity, like a corporation, you will need to open a business bank account to separate your personal assets.
Via PakApNews