Why you need a separate bank account for your business (even if you’re just starting out)

If you’ve been wondering, “Should I have a separate bank account for my business?” then you’re in the right place. Whether you’ve got a small business or a side hustle, separating your personal finances from your business finances is an important step. But why does it matter whether all of your finances are in the same account or separate accounts?

There are several reasons — including legal advantages, tax benefits, and operational ease — to take the extra step and establish a separate business account for your business-related finances. Whether you’re freelancing or have an established venture, maintaining a separate account is a smart, long-term business decision.

In this article, we’ll explore the benefits of a separate bank account for business and share best practices for separating company and personal finances, if they’re already intermingled.

Before we get into the benefits of having a separate bank account for your business, it’s important to understand the risks, if you’re uncertain. You may not enjoy thinking about worst-case scenarios, but understanding them is an important part of your business reality as a founder or operator. If you choose to keep your personal and company finances intermingled, you’ll open yourself up to several risks. 

Legal risks 

If you’ve formed an LLC or corporation for your business in order to limit your personal liability, keeping your personal and business finances together can actually “pierce the corporate veil.” In other words, when your finances are mixed together, courts may argue that there’s no legal separation between your personal assets and your business assets — so, creditors may go after your personal finances. 

Tax risks 

When you mix finances, it’s difficult to maintain clean tax records, and that can increase the chances of an audit. You may not be able to substantiate business deductions because it can be tough to show that they’re clearly tied to business activities. Plus, combined personal and business finances can also result in missed write-offs or incorrect filings. 

Operational risks 

If you want to have a clear picture of your business finances — such as your cash flow, burn rate, profitability, and true operational expenses — it makes sense to separate your business finances from your personal ones. Without the clear separation, you risk inaccurate forecasting, poor decision-making, and difficulty raising capital.

So, why open a business bank account when you already have a personal one you can use? In addition to avoiding the legal, tax, and operational risks (detailed above), separating your personal and business finances comes with benefits.

Financial clarity

A business account gives you a clean, accurate view of your company’s financial health so you can make strategic decisions with confidence. You can quickly spot trends, evaluate profitability, plan for cash flow, and forecast for growth — without personal transactions muddying the picture.

Easier bookkeeping and tax prep

When your expenses are separated, you’ll no longer have to sort personal transactions from business transactions. Tracking daily activity becomes simpler, and your books stay more accurate. This makes ongoing bookkeeping, year-end tax prep, and any audits that may occur significantly smoother to navigate.

More credibility with clients, vendors, and future investors

Appearances matter, and having a business account signals to others that you’re a professional. It can increase your clients’ and vendors’ trust and confidence in your business, and show future investors that you’re reliable and smart with how you handle your company’s operations. 

Access to business credit and loans

If you’re looking to scale your company, a business account can provide you with business credit cards, lines of credit, or loans that you can use to scale to the next step.

You should open a business bank account as soon as you register your business or when you start receiving business income, even if you’re a freelancer, side hustler, or sole proprietor. Ideally, it should be one of the first things you do as part of setting up your business. 

What kind of account should you open? The difference between a business account and a personal bank account has to do with the features and legal requirements, so it’s important to pick one that works for your needs.

The best business bank accounts offer: 

• Low or no fees
• Core features that align with your business’s growth, such as virtual cards, a treasury account, and working capital loans
• Integrations with your bookkeeping and accounting tools
• Reliable customer support and client services
• Resources for scaling businesses
• A simple and intuitive online experience (so you don’t have to visit a branch to get things done) 

Keep in mind that your personal and business accounts will work together. For example, you can pay yourself from your business account to your personal account, which makes it easy to manage taxes for yourself and your business.

If you’ve been wondering, “Can I use a personal bank account for business?” and you’ve just realized that’s not what you should be doing, don’t panic. There is a way to untangle your personal and business finances, so you can have a clean separation. Bonus: It typically doesn’t take that long, and most people are able to accomplish it over a few days. Here’s what you’ll need to do.

Checklist: Separate your finances in a week

• Open a business bank account. You may need an employer identification number (EIN) or Social Security number (SSN) to open a business bank account. An EIN is recommended for clean financial separation. This is a good time to get a business credit card as well.
• Pay yourself. Depending on which type of business entity you have, determine how to  pay yourself, such as a biweekly or monthly salary. This will help establish spending discipline for you and your company. 
• Identify and categorize the last 12 to 24 months of transactions. Separate them into business and personal categories. If you have a mixed category that needs more clarification, be sure to untangle it. 
• Record personal-to-business and business-to-personal transactions. Business expenses paid with personal funds should be recorded as an “owner contribution,” and personal expenses paid with business funds should be marked as an “owner draw.” Reimburse where necessary. 
• Separate business and personal receipts. Assign receipts to each transaction and keep digital copies where possible. 
• Update your chart of accounts. After you review your chart of accounts, consider working with a bookkeeper or accountant to ensure your tax categories are correct and to validate owner contributions and distributions. 
• Create an operating agreement, LLC agreement, or corporate bylaws. Re-establish limited liability and minimize any legal exposure with these documents. 
• Establish internal rules for going forward. Determine how to keep your personal and business finances separate for the long term — and stick to your plan.

Can I use a personal bank account for business?

While you can technically use a personal bank account for business, it’s best to separate business and personal bank accounts to avoid legal, tax, and operational risks. 

Do I need a business account if I’m a sole proprietor? 

You should still consider using a business bank account even if you’re a sole proprietor, freelancer, or side hustler. It’s a great way to keep your personal and business finances separate. 

What if I’m not making money yet? 

If you aren’t yet making money in your small business, you can still open a business account so that it’s ready for when you start earning. Choose a no-fee account. 

Can I deduct expenses if I use a personal card?

Yes, you can deduct legitimate business expenses if you use a personal card, but you must properly record and document the expenses.

Put the business bank account vs. personal bank account question to rest. Successful business owners and founders know you need both types of accounts to keep business and personal finances separate and to avoid any legal, tax, or operational risks. Plus, having separated finances gives you greater financial clarity, smoother bookkeeping, and more credibility with your stakeholders. 

Mercury offers tools to support both your personal and business finances, whether you’ve just started that side hustle or are ready to scale. Explore Mercury’s personal and business accounts and see how easy it is to have a smooth banking experience.

This article is for informational purposes only and does not constitute legal, tax, investment, or financial advice. Founders should consult their own legal and financial advisors before making capital or financing decisions.