Do You Need A Business Checking Account? (2024)

Business checking accounts are an essential tool and typically a requirement for any business operated as a separate legal entity from the owner. But in the modern world where side hustles, gigs and multiple income streams are common, the question of who needs a business checking account is a lot less clear. If you’re not launching a traditional small business, do you need a business checking account?

Here’s what you need to know about business checking accounts to decide if you need one for your entrepreneurial venture.

Business Checking Accounts vs. Personal Checking Accounts

At first glance, a business checking account doesn’t seem that different from a personal checking account. Both allow you to make deposits and withdrawals, draft checks, make ACH payments and make purchases and cash withdrawals with a debit card. Both can offer overdraft protection. And both are FDIC (Federal Deposit Insurance Corporation) insured, meaning your money is safe in the event of bank failure.

In terms of how checking accounts work, the main difference between a personal and a business checking account is the cost. Many personal checking accounts don’t charge a monthly fee or have easily waivable fees. Business checking accounts, on the other hand, almost always have associated fees.

While many banks waive their business checking account monthly fees if you meet certain requirements—maintain a minimum daily balance, have a minimum number of direct deposits per month or spend a minimum amount with your associated debit card each month—these minimum requirements tend to be higher than similar waivers offered for personal checking accounts.

How Does a Business Checking Account Work?

As with a personal checking account, opening a business checking account requires that you fill out paperwork and make an initial deposit. Once you have established your business checking account, you’ll be able to handle the following types of transactions:

• Check-writing. With a business checking account, you can order checks under your business name so that your payments will come from the business rather than you personally.
• Debit card payments. You can use your business checking account debit card to make purchases for your business. Additionally, some banks allow businesses to order employee debit cards so that authorized members of your staff can make purchases on the business’s behalf—but within the limits you, as the primary account holder, set.
• ACH transfers. You can send and receive paperless payments via your business checking account with ACH transfers. While most banks don’t charge you for receiving an ACH transfer payment, you may have to pay a monthly fee to send payment to your vendors or service providers via ACH transfer.
• Wire transfers. This kind of bank-to-bank transfer allows you to deposit or withdraw large sums of money to or from other domestic or foreign bank accounts. While many banks allow fee-free incoming wire transfers, expect to pay a fee for outgoing wire transfers. These fees may range from $25 to $30 for domestic wire transfers and $45 to $50 for international wire transfers.

Having a business checking account can also help you to start establishing business credit, even before you apply for a business credit card. You can do this by setting up net terms with your vendors and suppliers who report to a business credit reporting agency. With net terms, you defer payments to your suppliers for a predetermined period (generally 30, 45, 60 or 90 days), and your on-time payments under those net terms are reported to business credit reporting agencies, helping to establish your business credit.

What Do I Need to Open a Business Checking Account?

While you can open a personal checking account with an ID, Social Security number and initial deposit, the requirements to open a business checking account can be a little more demanding. To open a business checking account, you may have to provide the following documentation:

• Social Security number if you are a sole proprietor or Employee Identification Number (EIN) if your business is a corporation, partnership or limited liability company (LLC)
• Government-issued ID, such as a driver’s license or passport
• Business license and Articles of Organization (for LLCs) or Articles of Incorporation (for corporations)
• Organizing documents filed with the state
• Partnership agreement with the name of the business and its partners (for a business with multiple owners)
• Certificate of assumed name/Doing Business As (DBA) name (if you are operating your business under a name different from your legal name, e.g., legal name Li Wei Zhang/ DBA Zhang Consulting)

Why Get a Business Checking Account?

Between the fees and stringent paperwork requirements to open a business checking account, it’s understandable why side hustlers might avoid getting one.

But there are a number of excellent reasons why any small business owner can benefit from a business checking account.

1. Tax Simplification

The IRS recommends that all small business owners have separate bank accounts. While a sole proprietor—an individual who owns a business and is personally responsible for its debts—is not legally required to use a business checking account, it’s still a good idea from a tax perspective.

In particular, a business checking account simplifies the process of paying quarterly estimated taxes. Since your small business income is not subject to withholding, you are on the hook to pay estimated taxes quarterly. Calculating your business income and expenses will be a quarterly headache if you run your business through your personal checking account.

What’s more, the IRS requires sole proprietors to identify their business and personal transactions within their personal checking accounts so they can accurately file their taxes. And don’t forget: An audit of your business could expose your personal transactions to scrutiny if you mingle personal and business transactions within your consumer checking account.

2. Professionalism and Credibility

Many small side businesses start as lucrative hobbies. If you start an Etsy shop, for example, you may think of your business as a fun hobby, even as you get more sales.

But having a business checking account adds professionalism and credibility to your small business, even if it started as a hobby. Your clients and customers will be more inclined to trust your business when payments and transactions move through an account that uses your business’s name.

Finally, the issue of professionalism and credibility could affect your taxes in an audit. If you show no profits for three years out of five, the IRS will classify your business as a hobby, and you will not be allowed to deduct any expenses or take any loss for it on your tax return. While maintaining a separate business account for your business does not automatically confer “business” status on a venture, having a business checking account and keeping detailed records of your business transactions can help to show the IRS that you have a legitimate business.

3. Liability Protection

One of the benefits of registering your business as an LLC or corporation is the separation it offers between you and your business. This can protect you from personal liability in case something goes wrong at your business or someone tries to sue your business.

However, just registering as an LLC or other business entity is not enough to provide you with liability protection if you mingle your personal and business funds in a personal checking account. Unless you keep your personal assets and business assets separate, you could make your personal finances vulnerable since the mingling of assets makes it appear as though the business is not a separate entity.

4. Preparing You for Future Growth

Whether or not you intend for your small business to grow, having a business checking account gives you more options for future growth. For starters, having a business checking account legitimizes your business if you ever decide to apply for a business credit card or a business loan in the future.

Additionally, you’ll need a business checking account if your business grows. You’ll have a much easier time handling your financial accounting—including employee payroll responsibilities—if you start with a separate account. Opening a business checking account can be a savvy way to plan for potential growth.

Choosing the Right Business Checking Account

Many banks have business checking account limitations and benefits that can affect your business’s financial health. It’s important to understand these variables when choosing the right checking account for your business:

• Cash deposit limits. Your bank may limit the amount of cash you can deposit fee-free into your business checking account each billing cycle. After you have reached the limit, you’ll have to pay a cash-handling fee for any further cash deposits. If your business primarily deals in cash, you’ll need to find a business checking account with a sufficiently high cash deposit limit.
• Transaction limits. Banks may limit the number of transactions you can process each billing cycle—typically around 200 per month. After you hit the limit, you may have to pay a fee per transaction. Monthly transactions may include teller deposits, ATM deposits, checks and electronic debits and credits.
• Fees. As mentioned above, business checking accounts are likely to have monthly maintenance fees. It’s important to know the specific minimum balance and transaction requirements to avoid your account’s fees.
• Bundled services. Some banks offer business checking account fee waivers if you sign up for their merchant services or business credit cards.
• Interest. Some business checking accounts pay interest on your balance, although it’s important to crunch the numbers to see if the interest rate is worth any fees you may have to pay.

How Many Business Checking Accounts Should I Have?

It depends on your needs. There are a number of reasons why a small business owner may choose to have more than one business checking account, including:

• Separating expenditures. You may want to separate day-to-day expenditures from longer-term expenses, such as payroll and quarterly taxes.
• Tracking. Multiple accounts can help you better track operating income and expenses to understand and prepare for cyclical patterns.
• Avoiding account limits. You can handle your transaction and deposit needs without running afoul of each account’s monthly maximums.
• Earning interest. You can access interest-bearing accounts for funds that are not needed on a day-to-day basis.

Opening multiple business checking accounts can be helpful, but it can be tough to keep track of several accounts at once. To determine the right number of accounts for you, balance your need for financial flexibility with your capacity for financial tasks. Ensure that opening additional accounts makes your business life easier, not more difficult.

Do I Need a Business Checking Account?

If you have a traditional business plan or you intend to see your side business grow and thrive, a business checking account is a clear need.

The decision is a little less obvious when your business is a side hustle, gig or way to make ends meet. However, unless you are willing to keep meticulous records of your business transactions within your personal checking account, even an occasional side hustler may find that a business checking account is a worthwhile addition to their financial plan.

Choosing a business checking account that fits your business’s needs can help ensure that you protect yourself, your assets, your sanity (during tax time) and your business.

Frequently Asked Questions (FAQs)