Building Your Business Business Banking Why Your Business Needs a Business Bank Account By Rosemary Carlson Rosemary Carlson Rosemary Carlson is a finance instructor, author, and consultant who has written about business and personal finance for The Balance since 2008. Along with teaching finance for nearly three decades at schools including the University of Kentucky, Rosemary has served as a financial consultant for companies including Accenture and has developed online course materials in finance for universities and corporations. learn about our editorial policies Updated on November 29, 2022 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board Fact checked by Lars Peterson Fact checked by Lars Peterson Website Lars Peterson is a veteran personal finance writer and editor with broad experience covering personal finance, particularly credit cards, banking products, and mortgages. He has been writing and editing for more than 20 years and has a knack for digging deep into a subject so he can make it easier for others to understand. As an editor for The Balance, he has assigned, edited, and fact-checked hundreds of articles. learn about our editorial policies In This Article View All In This Article Clean and Accurate Bookkeeping Proof Your Business Is Not a Hobby Separate Entities Must Have Separate Accounting Provides a Clear Audit Trail for the IRS Demonstrates Professionalism The One Case You Might Not Need a Separate Account Frequently Asked Questions (FAQs) Photo: PhotoAlto/Eric Audras/ GettyImages When you start a business, one of your first tasks should be to open a business bank account. It's important to keep your business depositing and spending separate from your personal banking and it's not enough to simply keep separate records. Business owners may opt for different banks for their business and personal accounts or choose one bank that offers competitive accounts for both. Below are some reasons to keep your business funds separate from your personal cash. Key Takeaways A business bank account is an important first step for a business.A separate bank account for your business makes it easy keep business and personal finances separate and distinct.Small businesses with their own bank accounts demonstrate professionalism.While sole proprietors aren't required to maintain a separate business bank account, it's still a good idea. Clean and Accurate Bookkeeping You want to start your small business simply at the lowest cost. That's good. Before you decide to save money by not setting up a business bank account, consider the time and energy that keeping them together will cost you at tax time. Imagine your checkbook. Now imagine the volume of your bank statement if you chose to mix your business and personal transactions. Now imagine the number of entries you'll create over your first year of business. If your business grows in the years that follow, the complexity and volume of your transactions can't help but grow with it. You must be prepared to document and delineate all of these transactions in great detail during tax season each year, and if you mix personal and business finances, this process will be much more time consuming. Note If you have a separate account for your business transactions, you have a clean record to give your accountant at the end of the year. Remember to keep all your invoices and receipts to match your checkbook and bank statement entries, and you'll be in better shape when tax time rolls around. Proof Your Business Is Not a Hobby If you're running a business from home, it's crucial to keep business and personal expenses separate. You should take a deduction for your home business space, but you'll need to know detailed office expenses versus home expenses to make your write-off calculations. The Internal Revenue Service is picky about proving your business is in fact a business and not a hobby. Basically, you have to show a profit on Federal Tax Form Schedule C three years out of every five. If you have losses that you deduct from your income three consecutive years, the IRS may decide you're conducting a "hobby business." Even if you pass the "3 out of 5" rule, you're not necessarily safe from an IRS audit. You can further prove you're a business, and not a hobby business, if you have a separate business bank account and a well-maintained set of business books. Separate Entities Must Have Separate Accounting If your business is a separate entity, such as an LLC or a corporation, the IRS requires that you keep separate accounting and bookkeeping records, and a business bank account facilitates that. It doesn't matter if your business is a corporation or a partnership, or an incorporated sole proprietorship. If you're incorporated, you must have a separate bookkeeping system. When a business incorporates, it becomes its own legal entity and is set apart from the individual (or individuals) who founded the business. Note Generally, if you want to apply for a business loan, no matter what legal business type you have or where you get the loan from, you will most likely need a business bank account. Provides a Clear Audit Trail for the IRS You personally may never be audited by the IRS, but unfortunately for your business, it's always a possibility. When an audit does take place, it's really not that big of a deal—so long as you have clean record keeping through separate bank accounts. You need to be sure and keep all your invoices and expense receipts as backup material. If you mix your personal and business finances in one bank account, an audit by the IRS could turn into a nightmare. Demonstrates Professionalism You'll need a bank (merchant) to accept bank card transactions on your sales, which means you'll have to get a business bank account. If you have a retail business, you'll also need a business bank account for your point of sale system. You always want your business to maintain a professional demeanor. If you keep your business finances separate from your personal finances, it demonstrates your underlying dedication to professionalism and organization. This means that when you write checks to suppliers, they see that the checks are coming from a business—and the IRS sees this, as well. Furthermore, if you don't separate business and personal expenses, you can be personally liable for the actions of the business (and not just in financial transactions). The One Case You Might Not Need a Separate Account A sole proprietorship is not a separate legal entity. It refers to a person who owns the business and is personally responsible for its debts. If you're a sole proprietor and you combine business and personal expenses, you may not feel the need to keep business and personal transactions separate with bank accounts. You must still keep all of those business and personal expenses separate for tax purposes. You will want to take your business expenses as deductions on your Schedule C (business tax report) on your personal tax form. A sole proprietor can keep just one checking account as long as he or she makes certain that business and personal expenses are correctly labeled. Frequently Asked Questions (FAQs) What do I need to open a business bank account? After you've chosen a bank and the type of accounts you want to open, you'll need to provide the bank with a few documents. These will vary by bank, but typically you'll need to provide an employer identification number or EIN (or your Social Security number if you're a sole proprietor), you're business's formation agreements, your business license, and your ownership agreements. How do I open a business bank account? Opening a business bank is not that different from opening a personal bank account. After you find a bank that offers accounts with rates and terms you like, you'll provide the bank with some documentation, such as an employer identification number, and your business's formation documents. And you'll have to provide funds to deposit in your new account. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Internal Revenue Service. "Earning Side Income: Is It a Hobby or a Business?" Internal Revenue Service. "Publication 583, Starting a Business and Keeping Records." Small Business Administration. "Open a Business Bank Account." Bank of America. "How do I open a business bank account?"