According to one recent study, there are more than 30 million small businesses operating in the United States as of 2020 - a number that makes up for about 99.9% of all businesses, period. These organizations employ 59.9 million people, are responsible for creating about 1.8 million new jobs, and all told are responsible for the employment of about 47.3% of all workers in this country.
The decision to start a small business is one that will see you faced with constant decisions. Who is your target audience? What do they want and what do they need? Will you operate online or will you have a physical presence in your neighborhood? Is the product or service you're selling an appropriate fit for the current marketplace? The list goes on and on.
Having said that, one of the most important decisions that entrepreneurs have to make is also, unfortunately, the one they just don't spend enough time thinking about:
Whether or not they need a business bank account to handle funds coming into and out of the company.
Business Bank Accounts: Breaking Things DownIt's common for small business owners in particular to partially use a personal bank account to cover expenses - especially during those early days of the organization. Unexpected costs are cropping up all the time and that money needs to come from somewhere, so after any may raised has been exhausted your personal funds seem like the next best thing.
The issue is that once business expenses have become mixed with a personal account or credit card, it can cause a myriad of different issues - especially once tax season rolls around. It simply becomes hard to tell which was a personal expense and which was necessary for the business, potentially landing someone in hot water with the IRS or causing them to miss out on certain credits that they otherwise would have been entitled to.
One of the reasons why a business bank account is so important is because a bank will require more information of the account holder during the sign-up process. Yes, you'll still need to provide a Social Security number, your current address and other contact information. But you'll also need to show proof of having obtained a business license. You'll need to show your business bylaws or, at the very least, some type of operating agreement. You'll need to provide your company's EIN for tax purposes.
All of this is to get you started on the right path, so to speak - to make sure that your business expenses are absolutely separate from your personal ones in an attempt to help you avoid a lot of the issues outlined above.
Likewise, it's important to remember that if you've already taken the step to form a LLC (Limited Liability Company) for your business, you're actually required to keep your company's finances separate from your personal ones. Much of this has to do with the fact that an LLC is seen as its own unique thing - it's totally separate from its owner. This is to offer at least some level of legal protection against lawsuits and other claims. In the event that someone sues your company, they're doing exactly that - suing the business. Any damages are limited to the business' assets and the situation would be very unlikely to extend into your personal bank account.
If all of your finances are being kept separate through a business bank account, that is.
Finally, having a business bank account offers a level of legitimacy for your organization that a personal account would never match. Remember that regardless of the industry you're operating in, you'll likely be doing a lot of work with various vendors and people who will need to be paid for their services. From their perspective, what looks better - getting a check from a business bank account or a personal check from your own account?
The answer is clear: the former. A business bank account lets people know that you're serious, where a personal account essentially gives off the opposite impression. Not only that, but if a customer wants to write a check to your business and you haven't established a business bank account, they'd have to make it out to you personally - another situation you want to avoid.
In the end, opening a business bank account is a necessary step towards cementing the financial foundation of your company. It's a hugely important one that you never, under any circumstances, want to overlook.
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
