When it comes to managing finances, most people are familiar with the concept of a personal checking account. This is the account type typically used for day-to-day expenses, bill payments and personal banking needs. However, when it comes to running a business, a business checking account may be a stronger option. This type of account is specifically designed for business-related transactions, offering features tailored to meet the needs of both large and small companies or self-employed people. And yes, a business account is also useful for side hustles.
Understanding the differences between a personal and business checking account is crucial for entrepreneurs. While it may seem convenient to use a personal checking account for business purposes, doing so may lead to costly complications. Read on to learn more about the key distinctions between these two accounts and when you may want to consider each.
Key differences between business and personal checking accounts
There are a number of differences between business and personal checking accounts. A personal checking account is designed for individual use, allowing account holders to manage personal expenses, pay bills, make purchases and deposit paychecks.
A business checking account is specifically tailored to meet the needs of a business, including self-employed individuals and those with side hustles. This type of account allows companies to manage their cash flow, handle payroll, receive payments from clients and keep financial records separate from personal finances, which may be especially important, for example during tax season.
Key differences include:
- Transaction limits: Business checking accounts typically offer higher or unlimited transaction limits than checking accounts.
- Fees: Personal checking accounts tend to have lower maintenance fees, and many offer options for fee waivers based on direct deposit amounts or a minimum daily balance. On the other hand, business checking accounts generally come with higher fees including monthly maintenance fees, transaction fees and service charges for features like wire transfers or merchant services. However, these fees may also be waived if certain conditions are met.
- Features and services: Business accounts typically offer more robust tools tailored to business needs. These may include access to merchant processing services, payroll services and employee debit cards. Personal checking accounts usually lack these specialized services as they are not necessary for individual use.
Potential issues for using a personal account for business
There could be bookkeeping issues for using a personal checking account for business purposes. While it may seem harmless, mixing personal and business finances may make it difficult to track business expenses and income, which may create issues during tax season. In the event of an audit, the IRS or other regulatory bodies may scrutinize personal accounts if business transactions are commingled, leading to potential penalties or fines.
Business checking vs. personal checking: Benefits and drawbacks
Business checking benefits and drawbacks
Some of the benefits business checking offers can include:
- Better financial management: Business checking accounts make it easier to separate personal and business finances, which simplifies bookkeeping, tax preparation and budgeting.
- Tailored services: Business accounts often offer services specifically designed for business, such as payroll management and merchant services.
Drawbacks can include:
- Higher fees: Business checking accounts often come with higher monthly maintenance fees and transaction costs, which could be a disadvantage for businesses with low cash flow.
- Requirements: Opening a business checking account may require more paperwork and documentation, such as business licenses, articles of incorporation and an employer identification number (EIN).
Personal checking benefits and drawbacks
Using a personal checking account for business may have its advantages, particularly in terms of ease and familiarity.
- Lower fees: Personal checking accounts often have lower fees and no strict minimum balance requirement.
- Simpler setup process: Personal accounts have fewer complex setups than business checking accounts and flexibility for personal finance management.
Drawbacks can include:
- Complicated record-keeping: Not having the tools that are tailored for running a business to help streamline bookkeeping and business-management.
Can I use a personal checking account for business?
While it’s possible to use a personal checking account for business, it’s generally not recommended. You can open a second personal checking account for business expenses, but having a sole account dedicated to business can help create clearer boundaries between your business and personal assets.
On the financial side, using a personal account for business makes it harder to keep accurate financial records, which can lead to accounting errors, and increased complexity during tax season.
If you are just starting out and your business is small with few transactions, it may be acceptable to temporarily use a personal checking account. However, as your business grows, it may be a good option to switch to a business checking account to avoid complications and confusion down the road and gain access to features such as merchant processing services, payroll services and employee debit cards.
Making the switch from personal to business checking account
Once you’re ready to switch from a personal to a business checking account, you can follow these general steps:
- Gather documentation: To open a business checking account, you’ll need several documents. You might need your Social Security number (SSN) if you are the sole proprietor, employer identification number (EIN) or taxpayer identification number (TIN) if you are a corporation, partnership or business, and articles of incorporation, corporate bylaws or an operating agreement (if applicable). Your business license may also be required. You may also need personal information like your name, date of birth, contact information and a government-issued ID. Some banks may also require a first deposit to open an account and an estimation of monthly credit card sales. You can always contact the bank to determine exactly what documents they require.
- Research options: Look for a business checking account that suits your transaction volume, fee preference and service needs. Also consider minimum balance requirements, online and mobile features, bank and ATM locations, and other services.
- Decide who needs access to the account: Employees or partners may need debit cards, the ability to sign checks, pay bills or manage other business financial transactions. Determine who should have access and what that access should be, and whether there should be any limits on access.
- Open the account: You may be able to do this online or by visiting a local bank branch. Take the required documents and be prepared to make a minimum deposit (if required).
- Notify clients and vendors: If you’ve been using your personal account for business, be sure to notify any vendors, clients and anyone else who needs your updated account information.
- Update payment information: Also, be sure to update any automatic payments or subscriptions linked to your personal account to reflect your new business account details.
To ensure a smooth transition, plan to open your business account and update your payment information during a slow period for your business. This can help minimize disruptions during the switch and give you time to resolve any issues that arise.
How to decide if a business checking vs. personal checking account is right for you
When deciding between a personal and business checking account, consider your business’s structure, transaction volume, and financial goals. Ask yourself:
- Do I need features like payroll management or merchant services?
- Am I regularly processing a high volume of transactions?
If yes to any of those, you likely need a business account. Other factors to consider include:
- Fees and costs, including monthly maintenance fees, transaction fees, minimum balance requirements, overdraft fees, penalties and fee waivers.
- Transaction limits including number of free transactions allowed per month, limits on cash deposits, ATM withdrawal limits and fees for exceeding transaction limits.
- Account features such as online and mobile banking features, integration with accounting software, ability to set up direct deposits or recurring payments, customer support availability, access to business-specific services, tools for managing employee access, availability of credit lines, check-writing privileges and others.
- Deposit and withdrawal flexibility, meaning how quickly you can deposit or withdraw funds, cash deposit options, limits and access to electronic transfers and wire services.
- Security and other features such as fraud detection and prevention tools, FDIC insurance coverage and others.
- Tailored business services include access to merchant accounts for credit card payments, discounts on other business products, how easily you can generate financial reports or access year-end summaries and record-keeping features.
Consulting with a financial advisor or banker can also help you make an informed decision, ensuring your checking account meets both your current and future business needs.
Choosing between a business and personal checking account is an important decision for any entrepreneur or small business owner. While using a personal account may seem convenient, a business checking account offers tailored services, and better financial management tools. By understanding the key differences between these account types, you can make an informed decision that supports your business’s growth and financial health.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
