When you are going through all the trouble and steps to open a business, it might be tempting to put off opening a business bank account. After all, there are so many other tasks that are critical to the operation—it’s okay to ignore this one, right? Wrong! Opening a business account can help you in ways you wouldn’t expect, from simplifying your accounting, to establishing your business’s credit history in order to make it easier to get a loan. Here are seven crucial reasons to open a business bank account you need to consider.
1. Make Tax Preparation Easier
Having a business bank account helps automate your tax prep. It’s so much easier if all of your business income and expenses flow through your bank account because you or your accountant can link your business bank account transactions with tax preparation software. That way, whether you hire a tax preparer or you do it yourself, you will save yourself countless hours and headaches when trying to parse through your financials come tax time.
With a business bank account, you won’t have to try to figure out which expenses count as personal and which you can attribute to your business. This makes deductions at tax time close to a pleasurable experience. Bonus: in the case you or your business are ever audited by the IRS, you will have a clean audit trail, minimizing the potential for real trouble.
2. Automate Your Bookkeeping
Bookkeeping software can help you manage bill paying, accounting, budgeting, and invoicing, making your business’s finances a much simpler affair. With a business bank account keeping your personal and business finances separate, you can sync your bank account with your bookkeeping software. This effectively automates pretty much all of your bookkeeping!
With your bookkeeping software automatically synced to all your business bank account’s transactions, you can check up on the health of your business by plainly assessing your cash flow and income and expenses monthly or quarterly, without having personal transactions muddying the numbers.
3. Protect Yourself from Business Debt Liability
One advantage of establishing your business as a corporation or a limited liability company (LLC) is the fact that, should your company become unable to pay a debt, the creditor can’t legally come after your personal assets unless you did something to incur liability, such as break the law. However, if you mix your business assets with your personal assets by, for example, not keeping a separate business bank account, then your liability protection is essentially nil. This means a judge could hold you personally liable for business debts incurred. Based on the case, you could literally lose everything you own. This isn’t a fun incentive to open a business bank account, but it’s a vitally important one to consider.
4. Show the IRS Your Business Isn’t a Hobby
In order to legally count business expenses as tax deductions, your business must be legitimate and not a hobby. In order to legitimize your business, the IRS must be able to determine whether you are actually putting in the effort to make your business profitable or not. When determining whether you’re running a legitimate business in order to claim deductions, the IRS would also look at, “whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.” One way to do this, of course, is to keep all business income and expenses separate by having a business bank account.
5. Establish Business Credit
By having a business account at a local bank, you can establish a relationship for credit purposes. Lenders will use a business’s credit history when figuring out whether or not to loan the business money. In the case that you want to take out a loan to finance equipment, hire more employees, move to a bigger space, or other ways you might decide to expand your business, a favorable business credit history can help you get a loan with a decent interest rate. Without access to credit, in the form of bank statements, a credit card, or a line of credit, it can be difficult to make purchases on behalf of your business. With a good relationship and building credit with your bank, it’s much easier to obtain a business credit card with a good interest rate. Read more about how to establish business credit.
6. Make it Easier to Apply for a Loan or Government Support
The more organized your finances are, the easier it will be to assemble the documentation required to get a loan or support from the government. When you apply for a loan or a grant from a lender or the government, you will be expected to present a cash flow statement, a profit and loss statement, and your three most recent business bank account statements, among other documents. It’s obvious how having a business bank account will help you to meet these requirements.
7. Look More Professional
If you continue to use personal funds to pay business expenses, it might look very unprofessional. Clients and others you do business with may assume you only just got started (whether that is true or not!), you don’t believe your business is going to last, or that you are too lazy to put in the effort to establish your business as a legitimate entity.
Whether you are taking a client out to lunch or sliding your credit card across the counter to purchase goods for your business, it just plain looks better to do so with a business credit card. It also inspires more confidence in your employees and other service professionals if you are paying by check or direct deposit from a bank account that clearly belongs to your business, rather than paying from a personal account or with a personal check. A business bank account improves the image of your business by enabling you to pay using sources of funds that are branded with your business’s name. It shows that you take your business seriously and that others should, too.
A Business Bank Account Is Worth the Effort
As an entrepreneur, it’s likely you have a very full plate. However, by opening a business bank account, you simplify your financials and save time on paying taxes and doing your bookkeeping, which makes it worth the effort. Your business bank account can also help you get a loan and protect you from the IRS and creditors. You will also look like a more professional and serious business owner. So if you haven’t done so already, consider opening a business bank account today.