Entrepreneurialism has long been a defining characteristic of the United States, with a culture that values risk-taking, innovation, and business ownership.
This culture has helped make the US a hub for entrepreneurship and innovation, with a thriving startup ecosystem that attracts talent, investment, and global attention.
Many entrepreneurs get started by investing in themselves. They might reach out to family and friends for additional capital, but the goal is to bootstrap the idea independently so that it becomes a viable income-earning opportunity.
One of the first steps entrepreneurs should take is opening a business account. It differs from most people’s personal accounts in significant ways, ensuring that there aren’t financial questions to manage as the company or concept develops.
What Is the Difference Between a Personal Account and a Business Account?
The primary difference between personal and business accounts is that the latter is used to manage corporate transactions and expenses. A personal account is meant for personal or family-related expenses that don’t have business purposes. Many freelancers and entrepreneurs carry both to ensure compliance with local and national rules.
A personal account is typically used for individual financial transactions, such as paying bills, receiving income, and managing personal expenses. It usually has lower transaction limits, might have fewer fees, and offers fewer features than business accounts.
Business accounts are designed for companies to manage their financial transactions. It allows them to receive customer payments, pay suppliers, and track expenses. It often comes with higher transaction limits, may have more fees, and offer additional features such as invoicing and accounting tools.
Some business accounts require additional documentation to open, such as a business registration or tax ID number. Personal accounts can typically be opened with just a few personal details and identification documents, such as a driver’s license, passport, or mortgage documentation.
Overall, the main difference between a personal account and a business account is the purpose they serve and the features they offer to meet the unique needs of their respective users.
When Do I Need to Open a Business Bank Account?
It would be best to consider opening a business bank account when you start operating your company, regardless of whether you are a sole proprietorship, partnership, LLC, or corporation. Here are some reasons why
- Asset Separation. By opening a business bank account, you can keep your personal finances separate from your company’s accounting and books. That can help you manage your cash flow more effectively, track your business income and expenses, and make tax reporting easier.
- Professional Appearance. Having a business bank account can give your company a more professional image. It shows that you are serious about your sales or services and are taking steps to manage them properly.
- Legal Compliance. Depending on your structure and location, you may be legally required to open a separate business bank account. For example, corporations and LLCs are generally required to take this step.
- Personal Asset Protection. If your business incurs debts or legal liabilities, having a separate bank account can help protect your personal assets from being seized to pay off those debts or liabilities.
It is also worth considering the access to business banking services that aren’t available when routing your transactions through a personal account.
Business bank accounts typically come with features and services tailored to the needs of companies, such as check writing, online banking, merchant services, and commercial credit cards.
Why Do Personal and Business Assets Need to Be Separate?
By separating your personal and business assets, you can help protect your personal assets from being used to pay for business debts or legal liabilities.
If your business is sued or incurs debt it cannot pay, having separate assets can help shield your personal assets from being seized to pay those debts or liabilities.
Separating personal and business assets helps you comply with tax laws. By keeping separate financial records and accounts, you can more easily track and report your company’s income and expenses, which is essential for accurate reporting.
Some businesses, such as sole proprietors and partnerships, might choose to maintain co-mingled accounts for simplicity. A freelancer, for example, could maintain separate personal and business records, but have them in a single account. With this method, you’d lose the benefit of asset separation, but the accounting work would be simplified.
A one-person LLC could take a similar route. For most LLCs or corporations, separating personal and business accounts is better to limit litigation risks.
If you have questions about your financial situation, it is best to work with an experienced provider who understands your industry, market challenges, and logistics to ensure positive results.
How Do I Open a Business Account?
Are you ready to open a business account to support your company, startup, or entrepreneurial endeavors? If so, the first step is to select a bank.
It helps to research different banks to find one that meets your business needs. Consider factors such as fees, account features, branch locations, and online banking options.
Once you’ve chosen the financial institution, you’ll need to follow these additional steps to have your business account created.
1. Gather Your Documentation
To open a business account, you will typically need to provide some or all the following documents.
- Business Registration. Depending on your company’s structure, you may need to provide articles of incorporation, a partnership agreement, or a business registration certificate.
- Employer Identification Number. You must obtain an EIN from the Internal Revenue Service (IRS) if you are a sole proprietor, a partnership with employees, or have formed a corporation or LLC.
- Business License. If your business requires a license to operate, you will need to provide this documentation.
- Insurance Certificate. Some businesses must acquire surety bonds or other forms of insurance before they can start selling products or services. If your venture falls into this category, the bank might request to see your insurer’s certificate before proceeding with your account opening request.
- Personal Identification. You must provide personal identification documents such as a driver’s license, passport, or government-issued ID.
2. Schedule an Appointment
Once you have chosen a bank and gathered your documents, schedule an appointment with a representative at the financial institution to open your account.
Some banks and branches have limited hours, especially on the weekends. You might need to prepare for a significant wait in some places before an in-person meeting is available.
Many financial institutions have moved their opening requests to an online process. Check to see if you can do the work on your own time and wait for a response.
3. Complete an Application
You’ll need to fill out an application for the business account during your appointment or while online. The documentation will typically ask for basic information about your company, such as its name, address, and the type of work you do.
Once you’ve submitted this information, you’ll need to wait for approval from the bank or credit union. They can choose to deny your application.
4. Fund and Activate the Account
To start using your business account, you’ll fund it with an initial deposit. The deposit amount required will vary depending on the bank and type of account you are opening.
Once your account is funded, you can use it to manage your business finances. Please remember to keep personal transactions out of this register because that activity could result in “piercing the veil.” If that happens, the courts could rule that you mingled private and company funds, negating the benefits of having separate accounts.
Can I Still Pay Myself From a Business Account?
You can pay yourself from a business account, but there are some important considerations to keep in mind before taking that step.
If you are a sole proprietor, you and your company are the same entity for tax purposes. That means that any money you withdraw from your business account is personal income, and you must report it on your tax return. You may also be required to pay self-employment taxes on your transfer.
If your business is structured as a separate legal entity, such as an LLC or corporation, you will need to follow the rules for paying yourself as an employee or owner. LLCs might allow for taking a distribution of profits, which isn’t subject to payroll taxes. Paying yourself a salary from the business account would require that withholding.
Either way, keeping accurate records of any payments you receive from your business account is essential. This can help you track your income, manage your taxes, and ensure you follow all applicable laws and regulations.
How Long Does It Take to Set Up a Business Account?
Most banks can activate a business account on the same day they receive an application and requested documents. Owners should expect to spend a couple of hours at their appointment to verify everything, including their personal identity. Once the account is funded, it can be used to support the company.
I’ve always had a bit of an entrepreneurial spirit. After taking a vacation in the early 2000s, I had several family members tell me I should get into professional photography.
As an experiment, I created 20 prints that I framed and gave away as Christmas gifts. Everyone loved them, and the feedback I got was that the work became a conversation piece in the home.
“You should start a business doing this work,” I was told. That seemed like a great side hustle idea, so I went to the bank to open a business account.
And wow – did I arrive unprepared. I had a business name, but I hadn’t registered it yet. At that time, I didn’t even know that was a thing.
Do you have a business license? No.
Have you established a company address? No.
Do you have an insurance certificate I can see? No.
So, as politely as she could, the bank representative told me that I was on the right path, but that I needed to get these documents together and establish my business first. I thanked her, but then I overheard her laughing about me with others and how unprepared I was.
I resolved to do two things. First, I pulled my personal account from that bank. And secondly, I researched what I needed to do to start my side hustle.
Since then, my work has been displayed or ordered in over 60 countries. I’ve had magazine covers, countless newspapers, and independent publishers feature my work. Having a business account ensures my assets stay apart without disrupting my cash flow.
