Business Checking Accounts: What They Are and How They Work

What Is a Business Checking Account?

A business checking account lets you conduct day-to-day business transactions, such as accepting credit card payments from customers, paying invoices and bills, and transferring money into a business savings account. 

It serves the same basic function as your personal checking account but has slightly different rules, fees, and requirements to accommodate business activity.

Key Takeaways

• Business checking accounts operate much like personal checking accounts but have different features and fee structures.
• Financial experts recommend all business owners—no matter how small—have a business checking account to simplify bookkeeping and tax prep. 
• A range of business checking accounts is available to suit anyone, from occasional gig workers all the way up to owners of large ventures. 

How a Business Checking Account Works

A business checking account handles your business’s everyday cash management. Like your personal checking account, you can use it to receive money, transfer cash into savings, or pay for business expenses. 

Business owners have unique needs, and different types of businesses need different features and services. No matter what size or type of business you’re operating, there’s a business checking account that can match your needs.

For example, if you own a restaurant, you might need to deposit large amounts of cash, which means you should likely choose a bank with local branches and night depository services. But if you’re a freelance writer, you’re probably paid electronically, which means you might be able to choose from a wider variety of online business checking accounts.

When shopping for a business checking account, start by thinking about your business’s banking habits. Be clear about what types of transactions you need to make, how often you need to make them, what banking services you need, and how much you’ll keep in your business checking account. 

Business Checking Accounts vs. Personal Checking Accounts

Personal checking accounts and business checking accounts function similarly, with some differences. Owners of very small businesses and freelancers may not see much of a difference between their business checking accounts and their personal accounts. Owners of larger and more complex businesses, however, will notice more distinctions between the two. 

Here are the main differences:

• Ownership: While some banks may allow sole proprietors to open a business checking account with their Social Security number, you’ll generally need an Employer Identification Number (EIN) to set up the account in your business’s name. 
• Availability: Business checking accounts are widely available from many banks and credit unions, especially major ones, but they’re not quite as plentiful as personal checking accounts. 
• Interest rates: Checking accounts aren’t known for offering much in the way of interest. That’s especially true for business banking, where interest-bearing checking accounts are harder to find than in the personal banking world, and rates are often low. 
• Maintenance fees: Business checking accounts can be hives of constant activity—and like a beehive, a business account requires more upkeep than a personal one. For that reason, banks typically charge higher monthly fees for business checking accounts. 
• Third-party integrations: Many business bank accounts can be directly linked with other common business tools, such as merchant accounts that allow you to accept credit card payments or accounting software programs to streamline your bookkeeping. 
• Application requirements: You’ll need to submit more paperwork to open a business checking account compared to a personal checking account, such as your business’s formation documents, business license, written business ownership agreements, etc.
• Transaction fees and limits: You’d be hard-pressed to find a personal checking account that caps your transactions. But since businesses can have many more transactions per day than an individual person, it’s common to see transaction fees and limits with business checking accounts. 
• Fee waiver balance requirements: Business checking accounts typically require you to maintain a higher minimum balance to waive a monthly fee than personal checking accounts. 

Benefits of a Business Checking Account

Many business owners may think managing a second checking account for their business is too much of a hassle. In reality, the benefits far outweigh this minor hassle. Some reasons to get a business checking account include:

• Deposit insurance: If you manage your business finances out of your personal checking account, you’ll be subject to the $250,000 cap on FDIC insurance and NCUA coverage. But you can double your protection by opening a second checking account just for your business. 
• Streamlined taxes: Sorting out your business income and expenses on your tax return can be a nightmare if they’re intermingled with your personal funds. By keeping separate checking accounts for personal and business finances, you’ll find it much easier to properly record your business activities and take tax deductions and credits. 
• Employee access: You wouldn’t want to give your employees the keys to your personal bank account, but allowing them to manage parts of your business bank account can help you delegate duties to different team members. 
• Liability protection: Keeping your business and personal finances separate can help protect your individual cash reserves if someone ever sues your business. 
• Business legitimacy: Having a business bank account makes your business seem more official to potential business partners and lenders, and opens the door to professional options like merchant accounts and small business financing. 
• Better business planning: You can get a more accurate idea of your business’s cash flow and profitability at a glance if you keep your business funds in a separate business checking account. It’s not as easy to see in your personal account, and you could inadvertently spend personal funds on business expenses and vice versa. 
• Compliance with legal requirements: Some business structures, notably LLCs and corporations, are required by law to keep separate business and personal finances because these businesses are legally separate entities from their owners.  
• Future business financing options: You may not need financing options like business lines of credit or Small Business Administration (SBA) loans right now, but choosing to open a business checking account at a bank that does offer these benefits can give you a leg up when the time is right.

Important

Business checking accounts don’t always come laden with fees and rules. You can get basic no-fee business checking accounts at many banks, which might be perfect for freelancers and owners of small online businesses. 

Frequently Asked Questions (FAQs)

Can I Open a Business Checking Account Online?

The requirements to open a business checking account vary by bank and by business structure. Most banks and credit unions allow you to open a business checking account online, but some banks will require you to apply in person. For example, only privately held sole proprietorships, corporations, and LLCs managed by a single person can open a Chase business checking account online.

Can You Open a Business Checking Account as a Freelancer?

Yes, you can open a business checking account as a freelancer. If you haven’t opted for a business structure such as an LLC, you can open an account with most banks as a sole proprietor using your Social Security number.

Should I Have More Than One Business Checking Account?

It depends on your business. Having a dedicated business checking account for certain expenses, such as payroll, can be helpful for small businesses with more complicated structures. If you’re not sure, it’s a good idea to speak with your accountant.

What Is the Best Place to Open a Business Checking Account?

The best place to open your business checking account depends on your business’s transaction types, your future business plans, and how you prefer to do your banking: online or in person. There isn’t a one-size-fits-all “best bank” for all businesses, but here are some of the best free business checking accounts and the best small business bank accounts in general, based on our analysis. 

How Long Does It Take to Open a Business Checking Account?

Depending on the type of business checking account you’re opening and how you’re going about it, you can expect it to take as little as a few minutes to complete the process. 

The Bottom Line

Opening a business checking account is one of the first steps you should take when you’re launching a new venture. Make sure to spend some time shopping around for the right account, just like you would for any other financial product. Taking a little extra time now to get things set up right for the long haul can save you a lot of time and money down the road. 

Read the original article on Investopedia.