Can I Use a Personal Checking Account for Business?

Yes, in most cases you can use a personal checking account for your business (unless your company is a corporation or LLC). But this doesn’t mean you should.

If your small business is a sole proprietorship and you don’t want payments made out to a DBA, you’re right. You can legally operate using only your personal bank account.

The same applies if your business is a partnership and you want all payments made out to one or another partner. After all 1 in 3 four small businesses use personal bank accounts for work-related finances according to a Researchscape study. But legal doesn’t mean optimal. If you use your personal account for business, your data entry had better be perfect. The only thing separating your business and personal finances is correct accounting categories. Minor errors could mix up your business and personal transactions and cost you money. Think lost business deductions and tax penalties.

If your business and personal finances use different accounts, incorrect categories won’t be so serious. And, for most people, separate accounts make record keeping easier. As well, if your business is a corporation or LLC, the law requires that you have separate accounts.

“Fine, then. I’ll just get a second personal checking account for my business. Then my personal and business records will be separate. But I’ll avoid business account fees and stricter requirements at the same time. Problem solved.”

Problem solved, you say? Well, that’s debatable. Many banks won’t knowingly allow you to use a personal checking account for your business. If they offer dedicated banking for business purposes, they’ll want you to use it for your small business.

But suppose you don’t need special business-banking features and you do business under your own name. In that case, you might get away with using a personal checking account for business. But is trying to trick your bank how you want to run your business? And are you sure you don’t need an account optimized for business?

Freelancers, gig workers, and independent contractors are all small business owners. So are many online merchants, owners of small shops, and countless others. And they all have one thing in common. When they’re getting started, they want to reduce costs.

More often than not, this means they don’t set up as an LLC (Limited Liability Company) or corporation. Single-owner operations typically start out as sole proprietorships, multiple-owner operations as partnerships. Owners of sole proprietorships and partnerships are considered self-employed.

Self-employed people are not legally required to have separate personal and business bank accounts. So new business owners often do business using their personal accounts. After all, business checking often has fees and requirements that personal checking doesn’t. Ditto for business savings. Why not avoid these fees and requirements while you can?

If a personal bank account means reduced fees and easier qualification, why bother with business accounts? If you are a freelancer of limited means, you may think that sticking to a personal checking account is your best option for now. Sole proprietors and partners using personal checking accounts do need to keep careful records to avoid headaches. Lower fees and easier requirements may be worth some extra record-keeping in the case of some microbusinesses.

However, there are business checking accounts that are designed with freelancers in mind.

Nevertheless, having separate accounts for your personal and business finances does have advantages. This is true even when you’re a sole proprietor or partner. This article will tell you about these advantages. It will also direct you to resources for setting up your own business banking account.

If you open a business, you’ll soon discover the importance of keeping detailed records. Correctly classifying all income and spending is especially important. No matter how you set up your business, you’ll need this information to file accurate quarterly and yearly taxes. You’ll also need it to appraise your business’s financial wellness. What is it doing well? What does it need to do better? Instinct and intuition may be valuable to business owners, but neither can substitute for hard data.

“Duh, I knew that,” you say. “Before easy online banking and accounting tools, I’m sure you couldn’t get by without separate accounts. But the days of paper bank statements are long gone. These days — hey, I can just get some good accounting software that connects to my bank. It’ll let me categorize all my transactions while they’re fresh in my mind. Then, when the end of the year or quarter comes around, I generate some reports and — voilà! — I’ve got perfect references for doing my taxes, creating business financial statements, whatever. I’m not a C corporation, S corporation, LLC, or anything like that. I’m a sole proprietor. I even do business under my own name. No DBA here. I don’t need a business banking account.” (A DBA is a legally registered business name. The acronym stands for “doing business as.”)

A typical business bank account includes a checking and savings account. In this, it’s a lot like a personal bank account. But a dedicated business checking account will offer features that make it better for business than typical personal checking accounts. Here are some of them.

Payments by electronic funds transfer (EFT) via the Automated Clearing House (ACH) may be easier with a business checking account. Personal checking accounts do support EFT transactions. You’ve probably gotten a tax refund this way. But a business checking account might offer better support for some transactions. If such transactions are important to your business, you should ask about this when comparing business checking accounts.

More importantly, a business checking account may allow you to take credit card payments without using a third-party service. Disruptive technologies are making services like this cheaper all the time, of course. But reliance on third-party processing might still cost more than you’ll save on business account fees.

Another advantage of at least some business checking accounts is employee debit cards. Do you want to give employees access to your business account? Being able to order a debit card for each employee who needs one could avoid a lot of hassle. This might justify the account’s higher fees and balance requirements. It might even justify having to fill out more paperwork to apply.

Granted, you could give employees all the information they need to use your personal card. The writer has used clients’ personal cards for various purposes over the years, so he knows it can be done. Even so, a business checking account may allow you to set spending and withdrawal limits on the debit cards you give employees. And — let’s be honest — not every employee deserves to be trusted as much as this writer’s clients rightly trust him. Even those who do merit your trust might not have worked with you long enough to prove this. Do you really want to give every employee who needs to buy something for work access to your personal checking account?

You already know that having a separate bank account for your business means better record keeping. You also know it makes data entry errors less dangerous. Business bank accounts have a few more advantages closely related to these.

First, they teach you better thinking and bookkeeping habits. If your business and personal funds are always mixed together in the same account, they’re likely to get mixed together in your head. When this happens, you may pay personal expenses with business funds. Or you might start thinking about personal spending as deductible business expenses. Pooling your business and personal money encourages generalized confusion and bad bookkeeping habits.

Second, business checking accounts prepare you to take advantage of additional business services. Say you want to apply for a business credit card, line of credit, or loan. Having a dedicated, business-only account will make this easier. It will streamline the application process and make approval more likely.

Your eligibility for small business loans will benefit from the improved record-keeping that comes from keeping your personal and business finances separated. Separate accounts could also enhance your access to such other benefits as grants.

One way a separate business checking account may help contribute to your eligibility is by establishing a credit score for your business. Credit bureaus don’t maintain credit files for individual consumers only. They also keep records for some businesses. A business-only bank account is one way to encourage credit bureaus to start a file for your business.

Third, a separate business bank account makes the IRS less likely to decide you’re not an independent contractor but an employee. A lot of small business owners are one-person operations that provide services (such as editing or accounting). If that’s your situation, you need to do business in a way that keeps you from looking like an employee instead of a contractor. Setting your business up as a corporation or LLC is one way to do this. Maintaining separate business and personal bank accounts is another.

So, tax officials can classify contractors as employees. This makes some businesses reluctant to use freelancers who aren’t LLCs or corporations. But setting up and maintaining one of these legal entities isn’t cheap. It may cost more than you should reasonably spend if your business income is modest. Maintaining separate personal and business bank accounts, much less costly, may be enough for some clients. If you eventually do decide to establish an LLC or corporation, you’ll need separate accounts anyway. If you set them up while you’re still a sole proprietor (or partner), you’ll have less to do later.

If you already use a personal account for your business, this might be your next question. If you’ve been doing business with a personal account for a while, you may not want to change your account number or debit card. Can you just convert your personal checking account into a business checking account?

Personal and business bank accounts are separate products. So you can’t normally convert one into the other at will. Still, this is between you and your bank. The best thing to do is to contact your bank, describe your situation, and see if something can be arranged.

“I’m convinced I need a new, dedicated business account,” you say. “Now what?”

Usually, setting up a business bank account will require more paperwork than setting up a personal account. If your business is a corporation, the bank will want copies of your Articles of Incorporation. If it’s an LLC, you’ll need to provide your Articles of Organization. Either way, you’ll also need to show the bank your business license.

A business may apply for and receive an employer identification number (EIN) from the IRS. Businesses that have done so will need to provide their EINs to the bank. Corporations and LLCs should always have these. Partnerships will have them more often than not. Sole proprietorships may or may not have them. Sole proprietorships and partnerships with DBAs will usually have EINs. Owners of small businesses without EINs will need to provide their Social Security numbers. Since a bank will want your Social Security number when you set up a personal account, this requirement isn’t unique to businesses.

Business owners setting up checking and savings accounts will also need state-issued IDs to show their bank. This paperwork also isn’t unique to businesses. Banks also require personal account holders to show ID.

Individual banks will vary in the documentation they want when setting up business accounts. The preceding are typical minimums.

Once you’ve got all your paperwork in order, you’re ready to start shopping around for the account that’s best for your business. Our business checking comparison tools are a great place to start. Before comparing the best accounts, you might want to read more about opening a checking account, just to make sure you don’t miss anything.