Is a Personal Checking Account Suitable for Your Business? A Comprehensive Guide
The perplexing question for many small business owners is whether a personal checking account is adequate for handling business transactions. While it may seem convenient to use one account for both personal and business needs, it is crucial to understand the implications of such a practice. This article provides a detailed analysis of the pros and cons, bank policies, and alternatives that small business owners should consider.
The Dilemma: Personal vs Business Checking Account
It is unequivocal that a personal checking account is what it was meant for, and a business checking account is what it is meant for. According to bank policy, engaging in business transactions through a personal account is strictly prohibited. When undergoing an audit by the IRS, having a separate business checking account can provide clear documentation of business operations and income.
To avoid any issues, it is wise to separate personal and business financially by opening a business checking account dedicated to business transactions. Use your SSN for a sole proprietorship, or the business FEIN (Federal Employer Identification Number) for an LLC. This will ensure that your financial records remain clear and compliant with legal standards.
Setting Up a Business Checking Account
It is essential to create a separate business checking account. One option is to use the DBA (Doing Business As) name for sole proprietorships or the LLC FEIN for an LLC. By doing so, you demonstrate a clear distinction between personal and business finances. Additionally, consider setting up a money market savings account to store earnings. This account can serve as a buffer for any business income, making it easier to manage cash flow.
When you need to withdraw money from your LLC or sole proprietorship, the transaction is considered an owner's equity draw. This is different from direct salary payments unless under an S-corp election, where it can be structured for tax benefits.
Bank Charges and Responsibilities
While some banks might allow personal accounts to have a business name, it is generally advisable to use a business account. The business transactions will be under the business SSN rather than your personal SSN. This ensures that the account remains distinct and clear for tax and legal purposes.
Business checks should be made out to the business name, not to you personally. Failing to do so can lead to complications and charges from the bank. Local credit unions often offer better options for business accounts with lower fees and more flexible terms.
Legal and Financial Risks
Using a personal account for business transactions carries significant risks, including the possibility of commingling funds. This can happen when personal and business income and expenses are not kept separate. However, if the business is 100% owned by you, this might not be a major concern. It is crucial to respect the business nature of the account, deposit all business income, and pay only business expenses from it.
Irresponsible handling of this can lead to issues such as bank charges, unusual activity, and even Suspicious Activity Reports being filed with authorities. Credit unions often have better options for business accounts, with no monthly fees and flexible terms.
While online banking and mail-in options are available, explore internet banks for additional flexibility and lower costs. Some internet banks offer money market accounts that can be a good choice if you write fewer checks and want a flexible account to manage your earnings.
In conclusion, while using a personal checking account may seem convenient, it is crucial to separate personal and business finances for legal, compliance, and financial reasons. A business checking account is the way forward to ensure clarity, compliance, and peace of mind.