When starting a small business or side hustle, should you open a business checking account? …and When? If you have a legal company (registered with your state and having a separate tax ID), you will need a business checking account right away. Therefore, our discussion will focus on self-employed or contractors doing business as themselves (under their own social security number as tax ID).
Benefits: A major benefit of having a separate business account is to simplify tracking income and expenses. Mixing business and personal expenses gets messy, especially at tax time. It’s more likely that I could miss some expenses when the funds are mixed, causing both a higher tax bill and seeing the business as more profitable than it really is.
A separate account allows you to easily see your ‘balance’ in the project. You will know exactly how much personal cash has been put in, how much has been taken back out, and see positive cash flow by the account balance. Depositing revenue in the new account first provides a backup for tracking income. Equally so, by paying all related expenses from the account, they remain in one place (rather than trying to search through a blended account and separate business and personal at year end).
When The Timing Is Right: If you have an online store or need to set up credit card processing, then the checking account should come pretty early in the process. It’s much easier to set the deposits to hit the new account to start with than changing it later.
If you have a long lead time before you’re able to make sales or connect with your first clients, you may choose to wait until you begin receiving payments. If you go this route, make sure you’re diligent about tracking expenses up until you’re ready to open the account.
If you know you’re unlikely to keep up with the initial expenses, it may be best to go ahead and open the account right away. You can deposit the amount you need for start-up costs, and then draw against that balance as expenses are incurred.
Monthly Fees: If you are conducting business as an individual (rather than a registered entity), it is generally less expensive to open what the bank refers to as a ‘personal’ checking account rather than a ‘business’ account. The reason is monthly fees. Free checking still exists for individuals. Just tell the bank you want a new personal account and then restrict it for your business use.
If you walk into the bank and say, “business checking,” be prepared to walk out with $20-40 in monthly fees. On business accounts, they may charge for anything from the number of transactions to the total dollars deposited to using the night drop. If you are operating as an LLC or incorporated company, you will likely have to go the business route, but not so for the independent self-employed.
By the way, don’t underestimate the value of a credit union or small local bank for free checking. Sometimes the hours are not as convenient, but they make up for it with better rates and friendly service. It may advantageous to start building that relationship for when you’re ready to expand and need a loan to do so.