Business checking accounts are a crucial tool, and they are normally required for any firm that operates as a separate legal entity from its owner. However, in today’s world of side hustles, jobs, and many revenue streams, the question of who needs a business checking account is far less straightforward. No matter whether you are running a firm or working as a freelancer, everyone needs an account check. Let’s examine the way it works and the reasons why firms need it.
How Does a Business Checking Account Work?
A company checking account must be opened with documentation filled out and an initial deposit made, just like a personal account. You can manage the following kinds of transactions after setting up your company checking account:
Writing Check: You can order checks in your company’s name using a corporate checking account, ensuring that the company pays you rather than you personally.
Debit card payments: You can make business purchases using your debit card linked to your company checking account. Furthermore, some banks let companies buy employee debit cards, enabling authorized staff members to make purchases on the company’s behalf. As long as they stay within the parameters you, the main account holder, designate.
ACH Transfers: ACH transfers allow you to send and receive paperless payments using your business checking account. You could have to pay a monthly fee to send money to your suppliers or service providers via an ACH transfer, even though most banks don’t charge you for receiving ACH transfer payments.
Wire Transfers: You can deposit or withdraw substantial amounts of money to and from other domestic or overseas bank accounts using this type of bank-to-bank transfer. Although many banks offer charge-free wire transfers inbound, be prepared to pay a fee when sending money outward. And the charges for local wire transfers and international wire transfers are different.
How to Open a Business Checking Account?
All you need to start a personal checking account is identification, your Social Security number, and a small deposit. Opening a corporate checking account may have more requirements. It might be necessary for you to provide the following paperwork to open a business checking account:
- If you operate as a lone proprietor, provide your Social Security number; if your organization is a corporation, partnership, or limited liability company (LLC), provide your Employee Identification Number (EIN).
- Government-issued identification, like a passport or driver’s license.
- Business license and articles of incorporation (for corporations) or articles of organization (for LLCs).
- Organizing the business’s and its partners’ names in partnership agreement paperwork submitted to the state (for a business with numerous owners).
- Certificate of Assumed Name/Doing Business As (DBA) (if you are conducting business using a name other than your legal name, such as DBA Zhang Consulting / legal name Li Wei Zhang).
Why Get a Business Checking Account?
A business checking account has some great benefits that every small business owner may take advantage of. Let’s find out the reasons.
1. Tax Simplification:
It is advised by the IRS that small business owners maintain separate bank accounts. Using a business checking account isn’t necessary for sole proprietors, though it’s wise for accounting. While not legally mandated, it’s still a smart choice. It helps maintain clear financial records and separates personal and business expenses.
Specifically, a business checking account makes it easier to pay estimated taxes every quarter. As small business revenue is not withheld, you are responsible for paying estimated taxes. If you operate your business out of your checking account, computing your business’s revenue and costs will be a quarterly pain.
For sole proprietors to properly pay their taxes, the IRS also mandates that they distinguish the business and personal transactions within their personal bank accounts. Remember: If you mix personal and business activities in your consumer checking account, an audit of your company may reveal your transactions for examination.
2. Professionalism and Credibility:
Many small side ventures begin as successful activities. Having a company bank account gives your small business more legitimacy and professionalism. When payments and transactions are made using an account that bears the name of your company, your clients and customers will be more likely to trust you.
Lastly, in the event of an audit, the matter of professionalism and credibility may influence your taxes. The IRS will consider your business a hobby if you report a loss or claim no deductions for it on your tax return for three of the five years that it is profitable. Maintaining detailed records of your business operations and obtaining a business checking account could prove to the IRS that your company is legitimate. However, owning a separate business account for your business does not automatically grant it “business” status.
3, Liability Protection:
One benefit of forming or registering as an LLC is the separation it establishes between you and your firm. If something goes wrong at your firm or someone sues it, this can protect you from personal liability.
However, if you combine your personal and business funds in a personal checking account, simply registering as an LLC or other business entity will not shield you from liabilities. Since the mingling of assets gives the impression that the business is not a separate entity. You run the risk of making your finances susceptible if you don’t maintain your personal and business assets separate.
4. Future Growth:
Having a company checking account gives you more alternatives for future growth, whether or not you plan for your small business to expand. To begin with, if you ever want to apply for a business credit card or a business loan, having a business checking account validates your company.
If your company expands, you’ll also require a commercial checking account. Begin with a separate account that manages financial accounting, including employee payroll duties, much simpler. Then creating a business checking account is a wise decision for those looking to prepare for future expansion. It lays the foundation for organized financial management and facilitates scalability.
5. Help in Qualifying for Loans:
Maintaining separation between your personal and corporate accounts might also help you be approved for loans. There are several reasons why people take out loans. It’s possible that you’ll need a mortgage to purchase a home, or you may wish to use a loan to support business expansion.
When you apply for a loan, lenders closely examine your accounts, so it might be challenging to have your personal and business finances combined. This is where business checking helps in getting loans to grow your company.
Wrapping Up:
In summary, business checking accounts provide advantages including easier tax preparation, more professionalism, and liability protection, making them indispensable for entrepreneurs. Individuals can establish trust with clients and lenders, prove the validity of their businesses, and increase their loan eligibility by keeping their personal and company funds separate. Establishing and maintaining a business account requires little work, allowing entrepreneurs to concentrate on expanding their companies rather than managing finances.