Business accounts are designed for business owners, corporations, sole proprietors and freelancers for business-related transactions. In other words, they mostly exist to separate personal and business funds for taxes, liability protection and organization.
But do you need a business bank account? We spoke with legal and business experts, and they agree that business owners should heavily consider opening a separate business account — even if the law doesn’t require it.
Your business structure determines whether your business is legally required to have a separate bank account.
| Business structure | Required to have a separate account? |
|---|---|
| Sole proprietorship/freelancers | No |
| Limited liability company (LLC) | Usually |
| Corporation | Yes |
Lon Welsh, Founder at Ironton Capital and Your Castle Real Estate, states, “Technically, sole proprietors are not legally required to open a business bank account, but if you are operating an LLC or a corporation, you usually are required to keep your business and personal finances separate.”
A good rule of thumb is that if your business is a separate legal entity, you will need a separate account for the business. Examples include limited liability companies (LLCs) and corporations.
There are three main reasons to consider a business account (even if it’s not legally required):
Liability protection means that you’re protecting your personal assets from business debts or potential lawsuits. This protection is often called the “corporate veil.” LLCs and corporations generally give business owners limited liability, meaning the business’s creditors typically can’t go after your personal assets if the business is sued or goes bankrupt.
However, limited liability doesn’t protect you from things like fraud or malpractice or if you failed to make your business a completely separate identity. For example, if you mix your personal and business funds, you might fall under an “alter ego business.” This means the law does not recognize your business as a separate identity, and you could lose limited liability protection. As a result, a court may “pierce the corporate veil” and hold you personally responsible for wrongdoings even though your business is a separate entity.
Welsh added, “Many entrepreneurs don’t realize that they risk ‘piercing the corporate veil’ by not having a separate business account, which can put their personal assets on the line in case of legal disputes.”
To maintain your business’s liability protection and keep your personal assets safe, opening a business account to keep separate funds, records and assets is a simple solution.
Business accounts are very helpful in keeping track of everything that comes along with managing a business.
“Even if you are planning to freelance or take up a side hustle, you can avoid a lot of confusion, stress and potential legal headaches if you choose to keep your personal finances away from your business,” says Welsh.
He isn’t alone in this opinion. Joe Camberato, CEO & Founder of National Business Capital, agrees.
“Even if the law doesn’t force you to, running a business without a business bank account makes everything harder: financing, taxes, bookkeeping, you name it,” Camberato says. “It’s such a basic step that skipping it just creates unnecessary problems.”
So, even if the law doesn’t require you to have a separate account for your business, having one can make it easier for bookkeeping and everyday management.
You could just use a personal account to store your business-related assets, but that’s not recommended. Using a personal account for business finances — and especially mixing personal and business funds together — is risky.
“Putting business money into your personal account is a bad move for a few reasons,” says Camberato. “It can break the legal protections you set up with an LLC or corporation, it’s a red flag for the IRS, and it can stop you from getting approved for most business loans.”
Overall, having a business account can make your business look more credible and professional.
The main reasons you should consider getting a separate account for your business come down to taxes and liability protection, but there are tons of other positives to consider:
There are a handful of different types of business accounts, but like personal accounts, you’ll likely consider the two classic options: business checking and business savings.
Business checking accounts, like personal checking, usually include typical checking perks, such as a debit card for spending, checkbooks, wire transfers and ATM access. But unlike personal accounts, business checking can come with other handy features, like invoice creation, expense tracking, integrations with bookkeeping software, payroll options and more.
Business savings accounts earn interest on your deposits, just like personal savings accounts do. And similar to business checking, many business savings accounts come with extra tools like cash flow analytics, unlimited transactions or accounting software integrations.
Many businesses are required to maintain a separate account to distinguish between business and personal finances for tax reasons and to maintain liability protection.
While sole proprietorships and freelancers aren’t legally required to have separate accounts, it’s still a good idea to consider getting one. Business accounts can help keep things straight for tax season, aid in bookkeeping and increase your credibility and professional image.
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