Sole proprietorships are the default legal structure for companies with a single small business owner. You don’t need to fill out any paperwork or pay any fees to establish them, as they’re not considered separate entities from their owners.
However, that raises the question, do sole proprietors need a business bank account to keep their funds distinct? In a word, no – but they can benefit from one. Here’s what you need to know to choose for yourself.
Can I Open a Bank Account as a Sole Proprietor?
Though it’s not legally required, sole proprietors can open additional bank accounts to organize their business finances. In fact, they have more flexibility than other legal entity structures and can choose between business or personal accounts.
Opening a business bank account is more challenging, but not too much. Banks don’t review your personal or business credit reports, so you can open them with a limited credit history or even a bad credit score.
For example, you can get a business checking account with US Bank online with nothing more than your Social Security Number (SSN) and government-issued ID.
Many small business owners opt for business checking accounts because of the extra credibility they give you with vendors and creditors. However, personal bank accounts are easier to open and often have more favorable terms.
Ultimately, you can use either type, but make sure to open one. Using a single bank account for your personal and business activities inevitably leads to bookkeeping messes that make financial planning needlessly troublesome.
Reasons To Have a Business Bank Account
Business bank accounts offer several significant benefits to small businesses. Here are the primary reasons to consider opening one as a sole proprietor.
Helps in Establishing Business Credit
Qualifying for financing can be a significant challenge for many small businesses. Unfortunately, it’s also frequently crucial for their growth and success.
Even if you don’t need funding currently, it’s wise to prepare for the possibility in advance. You’ll need at least several months to build a good business credit score, so a head start is highly beneficial.
Opening a business bank account is a good first step that helps you build a relationship with a financial institution and potential lender. If you want to explore funding options later, you can do so more easily through that connection.
In addition, other lenders may check whether you have a business bank account when you apply for a credit account. If you don’t have one, they may be less likely to work with you.
Easier Bookkeeping
A dedicated account for your personal and commercial activities makes it much easier to track your monthly revenue, business expenses, and cash flow. That’s not unique to business bank accounts, but it’s still a significant benefit.
If you manage both aspects of your finances through a single account, they’ll become frustratingly entangled. You’ll waste hours combing through your bank statements to determine which transactions belong in each category.
Even if you don’t manage your financial records personally, get a separate account for your bookkeeper’s sake. They’ll thank you profusely for keeping your activities apart.
Simplified Tax Filing
Opening a separate business bank account streamlines your bookkeeping and makes it easier to create financial statements. Those documents are essential for fulfilling your tax obligations and staying on the good side of the Internal Revenue Service (IRS).
For example, you’ll need an accurate balance sheet and income statement to calculate your company’s tax liabilities and file your annual returns. Making mistakes can cause you to incur costly penalties and interest.
It’s a good idea to connect the checking account you use for business affairs to accounting software. It can track your activities automatically.
Your Business Appears More Credible
In addition to connecting you with a financial institution, using a business bank account can help you make a good impression in other commercial relationships. It looks more respectable when transacting with vendors and customers.
For example, say you want to collect payment from a new client using an ACH transfer. It looks much more professional to have them send the funds to a bank account in your business’s name than one under your own name.
Some sole proprietors can get away with using a personal bank account, but it becomes increasingly ill-advised the more sophisticated your business model becomes.
Who Legally Needs To Open a Separate Business Bank Account?
Whether or not you legally have to open a separate business bank account depends primarily on your company’s entity structure. Generally, the law requires it for those that exist separately from their owners.
That means sole proprietors don’t have any obligations regarding their business banking choices. Their owners can even choose to use a single personal account for all their transactions, though it’s inadvisable.
General partnerships work the same way since the only difference between them and sole proprietorships is the additional owner. As a result, they don’t have to use separate business bank accounts either.
However, it’s even harder to manage a partnership’s activities without a dedicated bank account than a sole proprietorship’s since multiple small business owners are involved. It’s much easier to open a joint business account than to juggle several personal ones.
Meanwhile, you’re legally required to open a business account if you form any other kind of business entity, including a limited liability company (LLC), limited partnership, limited liability partnership (LLP), or corporation.
Requirements for a Business Bank Account
Opening a business checking account isn’t as intensive as applying for a small business credit card or small business loan. The bank won’t check your personal credit score, and no hard inquiry will show up in your personal credit report afterward.
However, that doesn’t mean banks don’t ask anything of you. Here’s what you can generally expect one to require:
- Background details: Just like you would with a personal checking account, you’ll need to provide information like your name, phone, email, and address to get a business bank account.
- Identification number: Banks usually ask for your Employer Identification Number (EIN) when you apply for a business bank account. However, a sole trader can sometimes get away with using their SSN.
- Government-issued identification: You may need additional further proof of your identity with one or more forms of photo ID, such as your driver’s license or passport.
- Supporting documentation: Depending on your business and the bank in question, you may need to provide various documents, such as articles of incorporation, business licenses, or a Doing Business As (DBA) certificate.
Business bank account applications are usually pretty similar, but they can vary slightly between banks. It’s a good idea to check your prospective provider’s requirements and gather the necessary documents before starting the process.
Things To Look For in a Business Bank Account for a Sole Proprietor
Much like credit accounts, business bank accounts can have very different terms. Some are significantly more favorable than others, so it’s a good idea to explore options with multiple providers.
Don’t be afraid to take your time. Your choice can mean the difference between making a lucrative business connection and making an expensive mistake.
When you’re reviewing the options available as a sole proprietor, here are some of the primary factors to consider:
- Monthly fees: Business bank accounts often have higher monthly maintenance fees than personal accounts. However, providers may waive them if you meet certain criteria, such as a minimum balance or number of monthly deposits. Try to find one with requirements that you’re confident you can meet.
- Introductory bonuses: Though they’re more common with personal checking accounts than business ones, some banks and credit unions offer sign-on bonuses to new clients. For example, you can earn $300 with the Chase Complete Business Checking if you meet certain requirements.
- Transaction restrictions: Business bank accounts often limit the number of deposits and withdrawals you can make each month and charge a fee for every additional transaction. Look for an account with limits that match your activities to avoid incurring additional charges.
In addition to the terms and conditions, it’s worth looking at a bank’s customer reviews to learn about the average client experience. They can reveal potential issues you wouldn’t spot by looking at the institution’s website.
For example, that might include customer service problems, a glitchy mobile app, or difficulties withdrawing funds from accounts. Take the comments with a grain of salt, though, as they may be biased, mistaken, or falsified.
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