How to organize business money with checking and savings accounts
Many small business owners get started with nothing more than an idea and a self-funded shoestring budget. It’s easy to understand how personal and business transactions might mingle into a single bucket of income, expenses and savings in those early days. But that financial tangle could cause major headaches down the road.
That’s why it’s important to not only separate your business from your personal finances, but also to efficiently organize your business funds without overcomplicating your banking setup.
This article will explain how business checking and savings accounts can work together to simplify your business recordkeeping and create a clearer cash system.
Why separating business and personal finances matters
Your small business may feel like a part of you — your idea, your time, your passion, and, yes, your money. When it comes to your finances, though, it’s important not to blur the line between the personal and professional. Holding separate business and personal accounts, even if you’re a sole proprietor, can help make your income and expense tracking cleaner.
Proper business bookkeeping and organization isn’t a substitute for legal or tax advice, but your accountant will likely still appreciate the effort, especially come tax time. After all, you will need accurate business records to support your income, deduction and credit claims on your tax returns. Inaccurate or confusing business records, or transactions that get lost in your personal account, could even end up costing you money.
Use business checking for daily money movement
Your business exists, at least in part, to make money. And, as the saying goes, you have to spend money to make money. A business checking account can help you manage that operating cash flow, including customer payments, vendor bills, payroll and other routine expenses. Just do yourself (and your accountant) a favor and avoid running any personal expenses through that business account.
UX feature: Business checking should handle customer purchases, payments to vendors, payroll, office/daily supplies, monthly bills (rent, utilities, subscriptions, etc.), travel/gas costs and any other regularly occurring income or expense that results from the day-to-day operation of your business.
A business checking account is a nice foundation around which you can build the rest of your business banking strategy. There are many business checking account options available. The one that’s right for you will depend on your business’s needs. In general, research the monthly fees, transaction limits, cash deposit access, branch access, online tools and rules for authorized users before choosing a business account to open. Once you’ve opened your account, consider linking it with bookkeeping software and invoice and payment processors, as appropriate, to streamline your organization and recordkeeping.
Use business savings for taxes, reserves and planned expenses
Business savings accounts are best for cash you don’t need for your daily transactions, and they’re helpful organizational tools. For example, you may want separate savings accounts for your tax reserve, emergency fund, planned capital expenses or even a seasonal slowdown reserve fund.
Keeping money in savings accounts may help you avoid the temptation to spend funds you’ve reserved for future obligations or planned business growth. Remember to compare APYs, minimum balance requirements, monthly fees and access restrictions when you decide what accounts to open.
Build a simple business account structure
Don’t neglect your bookkeeping in the busy days of getting a business off the ground. It’s easier to set things up properly from the beginning than it is to organize your finances down the road. You can always make adjustments as your business grows or changes.
Starter setup
Start small when it comes to your business’s earliest banking structure. A checking account for your daily operations and a single savings account are likely enough in the beginning.
From there, you can add more accounts when it makes sense for your business and improves clarity and efficiency of your recordkeeping.
Expanded setup for growing businesses
As your business grows, you may find that additional accounts help you keep everything organized. You can build on your foundational checking and savings accounts with additional accounts for your tax reserves, emergency fund, capital expenses and more.
You can keep all of your accounts with a single institution, but you don’t have to. In fact, as your money grows, you’ll want to consider the limits of deposit insurance so you can best protect your assets. Separate accounts at a single institution don’t necessarily each receive their own FDIC coverage. Verify coverage before holding large balances and talk with the institution about your cash management options.
Separate finances by business entity type
Your business structure, whether sole proprietor, LLC or corporation, for example, will affect your tax filing status and documentation needs; therefore, it could also impact your banking strategy.
Sole proprietors
It may seem like overkill for a sole proprietor to have separate personal and business accounts, let alone multiple business accounts. But having separate accounts for your business and personal assets, as well as individual business accounts for different purposes, could dramatically simplify your income and expense tracking. After all, even sole proprietors must report business income, expenses and deductions on their taxes.
Without an LLC, you’ll likely open your business accounts under your own name (or a registered “doing business as (DBA)” name), but can often still qualify for business-specific accounts.
LLCs, corporations and partnerships
Unlike sole proprietorships, LLCs are state-registered business entities, which is part of why banks generally require you to open accounts under the business name rather than your own — even for a single-member LLC.
Partnerships and corporations are also registered businesses, but they may introduce additional considerations such as access, authorized users and approval processes when choosing the business accounts to open.
What documents and account details to prepare
The institution and type of account you’re opening, along with your business structure, will impact the documentation and information you’ll need to provide when opening your accounts.
Here are some items to have at the ready. Not every item is applicable to every type of business or business account:
- Social Security number or EIN
- Business formation documents
- Ownership information
- Business license
- Personal identification
Be sure to review your bank’s list of requirements before applying.
Common mistakes when separating business money
Once you’ve opened business-specific accounts, it’s important to manage them appropriately. Keep this list of don’ts in mind:
- Don’t pay personal bills from a business account. If you mistakenly make a personal purchase from a business account, or vice versa, save your receipts and other documentation and reimburse your account as soon as possible (again, keeping documentation of the reimbursement).
- Don’t deposit business income into a personal account. Keep it simple by keeping it separate.
- Don’t forget to set money aside for taxes, recurring obligations or expected capital expenses. You have separate accounts, so use them to clarify your bookkeeping.
- Don’t assume separate business and personal accounts are the same as legal or tax separation. Talk to professionals about how best to protect your business and personal assets.
Next steps to keep business finances separate
Now that you understand the reasons to organize your business transactions into separate accounts, it’s time to take next steps.
Start by researching institutions and deciding where you want to open your first accounts. You don’t have to stay with that bank forever, but ensure it will work for your business’s needs at least in the beginning. From there:
- Compare and choose a checking account for your daily operations cash flow.
- Compare and choose a savings account to hold your emergency reserves or funds for future obligations.
- Connect the accounts to your bookkeeping and other software, as appropriate.
- Review your balances, fees and account usage frequently, but at least monthly or any time your business changes significantly.
Frequently asked questions
It isn’t legally required for a sole proprietor to have a separate business bank account, but it’s still advisable. Separate business bank accounts can make bookkeeping simpler by keeping a firm line between your personal and business finances.
It’s a good idea to have a business checking account for your day-to-day cash flow as well as a savings account to hold funds for emergencies, tax reserves or savings for future capital expenses. The specific accounts you should open, though, will depend on your business needs.
You shouldn’t use a personal savings account for business money. Keeping your personal and business expenses separate will help simplify your recordkeeping for tax and other purposes. You don’t have to have an LLC or corporation to open business accounts, so even sole proprietors can take advantage of separate business accounts as organizational tools.
Deposit insurance depends on the institution and other factors, but, in general, the FDIC insures personal and business deposit accounts (checking/savings) at insured institutions up to applicable limits. You should verify coverage and talk with the institution about your protection options.
