Managing Money

When Is Your Business Big Enough for a Separate Checking Account?

Female small business owner plans to open her own business checking account
Written by Jay Egger

Hint: If you have to ask, you should already be doing it.

The question of when a business is big enough for a separate checking account is kind of a trick question. Although there are differing opinions on the subject, it’s always best to have a business bank account, regardless of the size of your business. In fact, small business owners are wise to open a business checking account before making any business transactions.

There are several reasons to separate personal and business banking but the primary reason is that it’s never a good idea to commingle funds. Commingling funds will pierce the corporate veil, which can personally expose you to your business’s liabilities. Mixing personal and business funds can also lead to accounting and tax problems in the future.

Why your business needs its own checking account

Your business is going to have a lot of receivables (money coming in) and payables (money going out). If all of those funds are going into a personal checking account, the risk of confusing which deposits, withdrawals, and transfers increases drastically. And confusion is what leads to accounting and tax headaches (and bills) at the end of the year.

With that in mind, here are the primary reasons why small businesses of all sizes — from startups to contractors, to sole proprietors — should have a separate checking account:

  • Expense tracking: An advantage to keeping personal and business accounts separate is that you’ll always know which expenses are personal and which are business. Furthermore, many business expenses are tax-deductible and the separate business account will help identify those deductions quickly.
  • Minimize bookkeeping errors: Whether you’re a sole proprietor keeping simple records or a small business that uses a record-keeping system, a separate business checking account will make it easier to reconcile your checking account on a periodic basis.
  • Be better prepared for an audit: Small businesses are not immune to audits by the IRS. Keeping your personal and business accounts separate will not only help you keep better financial records but it can also help prepare you for an audit or even prevent one from happening in the first place.
  • Preserve the corporate veil: The corporate veil shields the owners of a business from personal liability for debts or negligence of the business. However, if you are shown to be commingling personal and business funds, or diverting business assets for personal use, you can lose this protection. Without the corporate veil, you expose all your personal assets to a significant amount of risk.
  • Easy to open: With the right documentation (which is minimal), opening a small business checking account could take only minutes of your time.
  • Minimal cost: Most banks offer free checking accounts for small businesses. If there are fees for business checking, they can usually be avoided by carrying a minimum monthly balance or hitting minimum monthly deposits requirements.
  • Establish a banking relationship: As your business grows, your need for banking products and services, such as business credit cards, business loans, and merchant services will also grow. Opening a commercial checking account can be the first step in this forming a valuable banking relationship.

Business bank accounts are exclusively for big businesses. In fact, most small business checking accounts will look and feel a lot like the personal account you’re familiar with. They’re also just as easy to use and set up. Assuming you’re planning on having your business stick around for a while and grow, you’ll want to start off on solid ground by opening a business checking account.

How to open a business checking account

Opening a business checking account is easy, especially if you’re prepared with the right documents. Whether you open your account at a physical branch location or you open your account online, there are a handful of documents you will need, depending upon the legal structure of your small business.

Regardless of the structure of the business, you can expect to provide the following information:

  • Name
  • Contact information (personal & business)
  • Social Security number
  • 2 forms of personal ID (driver’s license, passport, Social Security card, etc.)

Open a checking account as a sole proprietor

If you’re doing business under a name other than your full legal name, you’ll need additional documentation to verify this. For example, if the owner’s legal name is Jack Smith and the business name is Smith Painting, additional documentation is needed. But if the business name is Jack Smith Painting, no additional documentation is needed.

One of these four document types will be needed if doing business under a different name:

  • Fictitious Name Certificate or statement
  • Certificate of Assumed Name
  • Business license
  • Registration of Trade Name

Open a checking account as a partnership, LLC, or corporation

For entity types other than a sole proprietorship, there may be additional documentation required. Here are documents needed, based upon the type of partnership:

  • General Partnerships will need a Partnership Agreement or they may use a Fictitious Name Certificate or statement, Certificate of Assumed Name, business license, or Registration of Trade Name.
  • Limited Partnerships may use either a Certificate of Limited Partnership or a Limited Partnership document.
  • Limited Liability Partnerships may use either a Statement of Qualification, a Limited Partnership document, or a Limited Liability Partnership Election.
  • Limited Liability Company owners will need either Articles of Organization, a Certificate of Organization, or a Certificate of Formation.
  • Corporations may use the Articles of Incorporation or a Certificate of Good Standing.

Keep in mind that, although these are generally accepted forms of documentation for most financial institutions, not all banks have the same requirements. Also, if you open an account at a physical location, you may need original documents. If opening an account online, the bank will provide instructions on how to deliver electronic copies.

Choosing the right checking account for your small business

Choosing the right bank for your small business checking account may be the most important financial decision you make. That’s because your future success can depend upon a few key factors related to your bank choice, such as how you finance your growth. So you want to find a banking partner you trust and that will be able to accommodate your business needs as you grow.

Here are the primary factors to consider when choosing a bank for your business:

  • Bank size: Community banks can be a good choice for sole proprietors and small businesses that do not plan to scale beyond their city or county. If you have aggressive growth plans or strategies, a regional or national bank may be a better choice. Larger banks also tend to have greater technology capabilities if electronic banking is central to your business.
  • Service: This is related to bank size. If you want your banker to know you by name and you like quick decisions made at the local level, a community bank or small regional bank may be your best choice. Alternatively, if you need evening, weekend, and holiday hours available to you, you may want to work with a national bank.
  • Location: Some businesses may have no problem doing the majority of their banking online. However, if you’re going to be dealing with a significant number of cash deposits then the physical location of a bank should be a primary concern.
  • Fees: Be sure to compare each bank’s schedule of fees and determine which bank provides what you need for a reasonable price. Keep an eye out for monthly service fees, minimum balance fees, cash deposit fees, wire transfer fees and foreign transaction fees. You should not have a problem finding free business checking, especially if your needs are relatively simple. Most checking account providers will waive any fees if minimum balance or deposit requirements are met.

As with most other financial decisions, be sure to look at multiple banks before settling on the right choice for your business. Also, keep in mind the big picture of your company’s future growth. As your company grows, your business banking needs are also likely to expand and, in that sense, the bank will be almost as integral as a partner in your business.

Final thoughts

The decision to open a business checking account is not a matter of if but a matter of when and the best time to get started is during the startup phase of your business. Commingling funds is never a good idea and keeping your personal finances separate from your business could be the best decision you can make for your future success. Plus, with easy setup and low (to free) cost, there’s no good reason to avoid opening a business checking account for your small business.

About the author

Jay Egger