If you are new to entrepreneurship or want to start your own business, finance management is a useful skill to have. The key to making your business known is establishing a legal business entity such as Limited Liability Company (LLC).
For this, you will need a business account that will help your organization grow independent of your finances. Most people would be tempted to use their existing account as both their business account and personal account since opening a new one seems like such a hassle.
Don’t fall into that trap. According to experts, this is a rookie mistake and causes a big mess later. This article will discuss the importance of a business bank account and how it impacts your start-up business.
What Is a Business Bank Account?
A business bank account is a specialized current account used by commercial businesses or sole partners to overlook the finances of their business. Making one as soon as you get your Employer Identification Number (EIN) is a requirement by the Internal Revenue Service (IRS).
It is also a prerequisite for procuring necessary loans. It helps you keep track of your cash balance and business expenses, make tax reports easier, and send and receive payments under your company’s name.
Why Should You Open an Account for Your Startup?
As a sole partner or a small business, you are not required to open a business bank account. However, opening one can help your business grow exponentially and make it easier to manage your finances.
Here are the reasons you should consider opening a business account for your start-up:
Distinct Personal and Business Finances
Creating a business account frees you from the struggle of constantly keeping track of your finances. Whether you receive a payment from a client or generate sales revenue, the money goes directly to your business account. A separate business account helps you monitor the cash flow and track the expenses simultaneously on a separate statement.
In case your personal and business finances are entangled, the ability to determine profit margin is impaired. You will need to remember and deduct your expenses every time you want to find your profitability.
Protection of Personal Assets
A prominent distinction between your personal and business finances prevents the authorities from holding your assets as liability for a lawsuit against your business.
Opening a Limited Liability Company (LLC) requires a business account to protect the owner from paying off company debts using their own money. Small businesses are more vulnerable to such instances due to their small size and corporate practices.
Hence, it is important to not “commingle assets” lest their assets are endangered.
Who doesn’t hate having to sit through personal payments and transactions at the end of the year to compile your tax returns?
With a business account, tax returns could not be more simplified. The key to a good book-keeping habit and accounting is to avoid surprises on tax day by tracking your business expenses throughout the year.
These expenses may include business travel, health insurance policies, advertising, employee benefits, retirement programs, and so on. When the data of all of the income and expenses your business has incurred is available in one account, it is easier to calculate the deductible expenses.
Additional Banking Features
Some business bank accounts and credit cards offer special features, discounts, and loans for small businesses. To facilitate small businesses, banks offer expanded time to pay your monthly bank fees. Other services include cash flow management that improves financial performance, cash deposit management, and credit card facilitations. These features help a start-up adjust its spending and monthly billings.
If you are a start-up, your goal is for people to take your business seriously. A business bank account helps you appear more qualified and professional. When you provide your bank details to a customer, they will check you out only if the initials are formal. Conducting transactions from a business account shows the clients and IRS that your business is legitimate and not just a hobby. Building credibility goes a long way. Professionalism also fosters relationships with banks.
Why is it important? If your small business needs financing, banks can lend you loans, and a good relationship increases your chances of getting one.
Whether you are a start-up or a professional, a business account can change your company’s future. It will never only add to your credibility but also saves time on taxes. Creating a business bank account is a professional decision that you will never regret.