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Why Do You Need a Business Bank Account in 2020

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If you own a small business or have a side hustle, a business checking account is essential. Your business bank account can help you keep your personal finances separate from your business finances. Not only is this good practice, but it can also help you quite a bit come tax time. And besides this, the IRS watches for (and audits) businesses that do not have a separate bank account.

One of the best business practices is to keep your personal and business finances separate. Today, you have plenty of online options for opening a low-fee or no-fee business bank account. But that’s not the only reason you should get one.Here are a few reasons small business owners should have a business bank account

1. When You Want to Keep Things Organized

Having a bank account where only business transactions happen makes tracking your profit and losses easier. It allows you to see problems quicker and helps you make profit adjustments earlier rather than later. Novo Bank is one bank that focuses on business banking, and you might find its checking account helpful for organizing your transactions.

If you were using one account with both personal and business expenses in it, imagine the headache of trying to sift through weeks’ or months’ worth of purchases to find out whether or not you made a profit last quarter.

Consider this: Keeping all your business transactions separate from your purchases makes weekly and monthly reconciliation easier. And this creates fewer headaches during quarterly and yearly tax preparation.

You’ll also be able to see all business-related fees, memberships, and subscriptions in one place. Not so simple if you have personal expenses, club memberships, and magazine subscriptions altogether.

Remember, business fees and memberships/subscriptions qualify as tax-deductible business expenses. But of course, you’ll have to be able to prove it through proper and organized record keeping.

2. When You Need Flexibility

Having a business bank account allows you to accept more types of payments from clients. Especially if you do business online and/or have international clients.

Accept credit cards and payments via PayPal, Stripe, and TransferWise. You can also sign up for merchant account ACH bank-to-bank transfers. This is something you can’t do with a personal checking or savings account.

Something to note: Apps like FreshBooks and 17Hats won’t allow you to accept payments from these third-party payment processors unless you link a bank account to your FreshBooks or 17Hats account.

A business account allows for future business structure expansion. You may decide to grow your business and add a partner. Or you may take on employees. Or move from a sole proprietorship to a different structure. If so, you’ll need to have a business bank account.

A business account lets you give other people access to the account—for example, a partner, an accountant or bookkeeper, or an employee.

3. When Accountability is Important

Having a separate business bank account allows you to stay accountable to other aspects of your business. For instance:

  • Give an accountant or bookkeeper access to help you manage and double-check your business finances. (This means you don’t have to give them access to your personal transactions.)
  • Know what’s going on with your business financials each quarter. See how the business is doing overall, so you can adjust for future growth.
  • Manage your business budget each month.
  • Know what’s going on with your business, where the money is coming from, and where it is going.
  • Keep track of all sources of income, expenses, merchants, and clients. This makes tax time more manageable for you and your accountant.

4. Professional Credibility

A business bank account will give you the professional credibility that a personal bank account can’t. It doesn’t matter what type of business you run, whether it’s an LLC (limited liability company), incorporated company, sole proprietorship, or a side hustle.

As a business owner, you’ll not only be taking payments; you’ll be making payments as well. Create an account with your professional business name. Any checks you write will have your business name on it. Your personal account allows only your name on checks.

What looks better on a check or invoice to a client or merchant? Your name or your legal business name?

A business account legitimizes your company and gives you professional credibility when it comes to writing checks, accepting payments, and sending invoices because the account is in your legal business name.

5. IRS Inspections

The IRS guidelines for small businesses state that owners may keep any records necessary that best suit their business. They need to show any income and expenses clearly. The best way to do that is to make sure your personal transactions are kept as far away from your business transactions as possible. You’ll thank yourself if there’s ever an audit.

For some small businesses just starting out (and for some side-hustle businesses), there is the question of whether it’s considered a hobby or business. According to the IRS publication, if you are keeping things organized with a business account and can prove you are making a profit, you shouldn’t have a problem.

Bottom Line

When you’re running a business, it’s a good idea to keep your business and personal accounts separate. Consider opening a separate account designed to manage your business income and expenses. You can pay yourself from that account and keep your personal and business expenses separate. This not only makes bookkeeping easier, but it is also in line with best practices.

If you qualify for a business account, look for an account that offers features you’ll use and that you know will work best for you. Carefully compare your options and make a choice that is best for your business. And who knows? Maybe your local credit union will have business account options. Here you can find our list of best business checking accounts.

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