April 30, 2019
The short answer: absolutely. In-fact, this is one corporate formality shared by both Corporations and LLCs, where both are legally-required to maintain a distinct bank account for their business, independent of the bank accounts of the owners. But why?
To understand why LLCs and Corporations must maintain their own accounts, we need to first understand what is meant by a “business structure”. A business structure is a type of legal entity through which an owner decides to operate their business.
Ultimately determined by its owners, the business structure can have important long- and short-term implications for a business. According to the U.S. Small Business Administration:
“The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.”
When a business is registered as an LLC or a Corporation, it is considered to be “incorporated”, and is from thereon treated as a separate legal entity, distinct from its owners. In other words, when a business is successfully incorporated, it’s treated as if it were “just another individual” with its own liabilities, tax responsibilities, and revenue.
To this end, owners of these types of business are required by-law to separate the business’ finances from their personal accounts. Owners of LLCs or Corporations that comingle their personal and corporate accounts—whether by-accident on intentionally—put both their business and personal assets at serious risk.
But what if your business isn’t an LLC or Corporation? Do the same rules apply for owners of non-incorporated business structures like Sole Proprietorships or General Partnerships? Not exactly.
The Importance of a Separate Bank Account (Even When it’s Not Required)
Because incorporated businesses are considered distinct legal entities, their owners are legally required to distinguish business and personal finances. However, this isn’t the case for non-incorporated business, which are more-so treated as an extension of their owners rather than separate entities.
For this reason, owners of non-incorporated businesses are generally not required to keep a separate bank account for their business. However, most legal experts advise that these individuals—even though they’re not required by-law—keep their personal and business financials separate. There are a number of reasons why this is considered best-practice.
Organized Bookkeeping:
Any business—regardless of size, structure, or complexity—will benefit from well-maintained bookkeeping. Tracking a business’s income, expenses, and payments can be obfuscated when personal transactions are included in the ledgers. When this happens, it can be difficult to evaluate a business’s true performance. Understandably, many new business owners will finance their start-up costs through a personal account. Importantly though, these accounts should be distinguished once the operation is up, running, and stable.
Creditability:
Many owners that opt to use their personal account for business purposes don’t consider how this appears to 3rd parties. In general, a separate business account indicates that a business is indeed a business, not a hobby. This may sound trivial, but it’s an important distinction for customers, lenders, and other potential investors.
Tax Purposes:
There’s an important point to be made in regard to business taxes: all state- and federally-recognized businesses, according to the IRS, will be taxed separately from an owner’s personal transactions. Regardless of the business structure, owners must report business transactions separately from personal tax information. Keeping separate bank accounts will not only make tax-filing easier, it will reduce the risk of potentially-costly tax mistakes.
To Obtain Financing:
Lastly, thriving businesses that are looking to expand will eventually require more capitol and financial resources. Maintaining a seperate business bank account will allow an owner to open a line of business credit or procure business-related loans. These oftentimes aren’t available (or are more difficult to obtain) with personal banking accounts.
How to Open a Business Banking Account
Opening a business banking account is relatively simple, however it’s strongly recommended that owners “shop” around for the account that best suits their company’s needs, as not all business bank accounts are identical.
Also, specific documentation is required for different types of business structures. For instance, owners of Corporations will need to provide their taxpayer identification number and their articles of incorporation. Likewise, because corporations tend to have multiple owners or shareholders, it’s often recommended to find an account with multiple-signing authority.
Remember, not all businesses are legally obligated to maintain a separate bank account for their business. Usually, businesses that are incorporated (namely, those with a Corporation or LLC structure) are required by-law to separate the owners accounts from the business’ accounts.
However, most legal experts advise that all business owners—regardless of their business structure or legal requirements—keep their personal and business financials separate. Not only does this help organize the accounting, it boosts the business’ credibility and makes it easier to procure loans or funding. Additionally, maintaining separate accounts tends to ease the burden of filing year-end business taxes.
