Do I Need a Business Bank Account If I’m Self-Employed?

Business owners, especially first-time ones, often get confused about whether or not they need a business banking account or if it is okay to just run everything through their personal accounts. The answer can be especially confusing for self-employed people.

When a business is just starting, it is very tempting to simply continue using the natural inertia that has been going on. After all, it was a personal account that was used to pay for business licensing and other startup costs. It just seems to make sense to follow the same path forward. And when transactions are few and the activity is light, it is easy to get lulled into a comfort zone.

On the surface, the simple answer is… You do not need a separate business account when you are self-employed. That being said, smart self-employed people operate with business accounts that are separated from their personal ones.

Table of Contents

• Tax Implications

• Confusing Information & Data

• Overseas Ease

• Professional Appearance

• Avoiding Legal Entanglements

• Easier Applying for Business Credit or Loans

• Have a Smooth Exit Strategy

• Good Ideas Proliferate in Business

• FAQs

There are good reasons to keep your business money separate. We are going to talk about why we think it’s a smart move for people who work for themselves to have a special bank account just for their business.

Tax Implications

There are major tax implications. The IRS recommends that small businesses and self-employed people maintain separate business bank accounts. While this is not legally required, even for a sole proprietorship, from a tax perspective, it is very smart. It is much easier to “follow the money” and demonstrate to the IRS where legitimate tax deductions exist when funds are not commingled with personal income and expenses. Especially if you have a joint bank account with someone else such as a spouse.

Confusing Information & Data

Avoiding the comingling of funds is a basic “best practice” in accounting. And certainly, that should apply to the banking level.

Overseas Ease

When you have to make overseas payments, it may be helpful to have a business banking account. Additionally, it provides a level of transparency and some separation between that payment and your personal image. In this age of international terrorism, governments, businesses, and even individual people are highly sensitive to any appearance of impropriety or even remote association with a perceived terrorist. When a business gets embroiled, whether knowingly or unknowingly, a business account can move you one more step further away from negative perceptions.

Professional Appearance

Having a business account gives a more professional appearance, especially when paying vendors or making payments to other people. If we invest in logos, professional-looking paperwork, and perhaps signage, then why would we be inclined to whip out a personal checkbook to conduct business?

Avoiding Legal Entanglements

Maintaining separate bank accounts may prove fortuitous down in case any messy legal situations arise in the future. Over the course of business things get unpredictable. One never knows what may happen. What if a disgruntled customer, vendor, or work associate sues you? It may prove helpful to have banking separated for your personal account.

Easier Applying for Business Credit or Loans

Should you ever decide to apply for business credit or loans, it is much easier to demonstrate financial flow when you have a separate business account in place. Should financiers question or become confused, you never want to appear to be making up excuses or having unconventional explanations. Having a separate business account minimizes these wrinkles.

Have a Smooth Exit Strategy

Should you ever decide to sell your business (or perhaps bring in a partner) it is certainly nicer to do so when you don’t have to reveal all your personal finances as well. Having a separate business account allows you to have the confidentiality you desire.

Good Ideas Proliferate in Business

Doing more than required creates business excellence. It is akin to doing more than expected, a founding principle and part of the mission statements of many businesses. “Are separate business accounts required?” might not be the best question. A better one might be, “How would a separate business bank account help make me happily successful?”  Think of separate business bank accounts like seatbelts or life vests. Whether required or not, they are good ideas.

FAQs

Can I use my personal bank account if I’m self-employed?

Yes, you can use your personal bank account for business. But you may find keeping track of your business finances and separating them from your personal activities may prove very difficult.

Is it legal to use my personal account for business? 

Yes. Just be sure to keep good records for filing both your personal and business taxes with the IRS and state government.

What areas can get messy when I run my business through my personal bank account?

Having both personal and business finances in the same account opens both fronts to errors and exposure. For example, should a customer’s payment bounce due to insufficient funds, the shortfall now affects both the business entity and your personal life.

Disclaimer

The above information is advisory and general. It does not constitute definitive or legal advice. Legal matters should be discussed with a practicing attorney. We recommend that you consult with your banker for financial advice.