Business vs. Personal Bank Accounts: Which Is Right for You?

When it comes to your money, mixing business and pleasure is never a good idea. Advantages to keeping them separate include tax benefits and liability protection for your personal assets.

But before you can enjoy these benefits, you have to understand a business account versus a personal bank account.

What is a business account?

A business bank account is a financial account explicitly created for business and professional banking. All work-related transactions and expenses are tied to the business banking account instead of the business owner’s personal accounts.

There are several differences you’ll notice right away regarding business accounts:

• Some business accounts have higher everyday fees and higher minimum requirements.

• They’re also subject to maintenance fees.

• Unique merchant services are available to business account holders.

You can open savings and checking accounts for your business finances.

Business checking accounts

Business and personal checking accounts function almost the same, but business accounts typically have higher fees. Fees may be waived in certain situations, but the minimum requirements are higher with a business account.

Business savings accounts

A business savings account stores excess funds just like a personal savings account. Both account types have the same benefits, like earning interest and using extra funds as overdraft protection when you overdraw.

What are monthly maintenance fees for business accounts?

Business checking accounts have higher associated fees and, depending on the bank or credit union you use, some may charge more than others.

There are ways to avoid some of these fees, like keeping enough money in your account to prevent overage charges and spending a minimum amount on your business debit card. Be sure to carefully review the terms and conditions before you open a business bank account.

6 reasons to separate business and personal bank accounts

Despite their apparent similarities, business bank accounts for LLC ventures and personal checking accounts are vastly different financial services. Here are six reasons to keep them separate:

1. Limited personal liability

You must separate your personal and business finances to establish a limited liability company (LLC) or corporation. Once you do, financial claims for your business cannot affect your personal assets. Business accounts are also insured by the FDIC.

2. Legitimized operation

All payments and transactions tied to a business account are associated with the business's name, giving it more credibility and legitimizing your operation. Customers will see your name on checks and other transactions if you're using a personal account.

3. Organized budgeting and bookkeeping

Tracking your finances is already challenging without business payments, checks, and transactions tied to the same account. Separate accounts make bookkeeping more organized.

4. Easier collaboration

You may have to issue credit or debit cards to employees so they can aid in business operations. If these cards are tied to your personal account, your finances are at risk.

With a separate business account, an accountant or assistant can handle payments in your stead without risk. You can also use third-party merchant services to manage your business finances and share access.

5. Access to business credit lines and lending

Suppose you want to open a line of credit for your business or take out a business loan. You’ll need business checking and savings accounts — and related records — to establish creditworthiness. Your business’s credit score is separate from your own.

6. Clean audit trails

You’ll have cleaner and more organized audit trails — vital if the IRS or another agency ever audits you or your business. During tax season, you’ll have an easier time claiming business-related expenses. Mingling might also require you to claim cash rewards earned by your business as part of your annual income.

Can I use my personal checking account for my small business?

It’s not advisable, but you can use a personal checking account for your small business under certain conditions.

If you’re a sole proprietor — meaning you and your business are legally the same entity — using your personal accounts is acceptable.

A corporation or LLC is a legally distinct entity from its owner, so these businesses need their own account.

Even if you aren’t required to keep separate accounts by law, mixing your personal and business finances may make it difficult to track expenses. You’ll also find it difficult to file and keep track of your receipts and reports during tax season.

Is having a business account worthwhile?

The answer is unequivocally yes. There are many reasons, but the most important is that a business account separates your finances and transactions, protecting your personal assets from legal liabilities.

Establishing a business as an LLC instead of a sole proprietorship means it is an entirely new entity. If the LLC or corporation cannot pay its debts, creditors and debtors can only go after the LLC’s connected accounts and assets. They can’t seize the owner’s cars, home, or bank accounts that aren’t connected to the business.

There are exceptions, but the gist is that having separate business and personal bank accounts keeps you protected.

What to consider before opening a business bank account

Here are some vital considerations before you open a business bank account and separate your personal finances:

What are the minimum balance requirements?

Every bank has a minimum balance requirement — the minimum amount of money you must keep in the account for it to be considered open and active. Typically, business accounts have higher minimums.

Some banks will charge a monthly fee to encourage you to meet these thresholds.

Are there cash flow limitations, and what are they?

To prevent fraud and malicious activity, some banks impose a cash flow limitation on accounts, denoting how much money they can exchange per day.

Depending on the bank or credit union, this amount could be anywhere from $10,000 to $100,000 or more. Make sure you understand these limitations when you open an account.

What is the fee schedule?

Financial institutions make money through bank fees, including overdraft, wire transfer, ATM, cash deposit, and maintenance fees. These fees are often automatically taken out of your account, meaning you must have the funds to cover those and other expenses. Remember the dates these fees will be charged and account for them in your budget.

Will the account earn interest?

A business savings account may earn interest, ensuring your money doesn’t just sit there. Investigate the available interest rates and whether they change based on the amount of money you keep in the account.

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Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.