Do Sole Proprietors Need A Business Bank Account

Why You Need A Separate Business Bank Account For Your Small Business

HomeBlogSmall business tipsWhy you need a separate business bank account for your small business

A business bank account gives you the opportunity to apply for business loans and lines of credit, boost business credibility, and, most importantly, begin accepting payments from customers.

While limited companies are required by law to maintain a separate business account, sole traders are not obliged to do so.

That said, business accounts do offer a range of benefits and discounted services, and also make it easier to separate business and personal activities.

This reduces the risk of receiving penalties from HMRC for unintentionally submitting false information.

In this guide, well show why a separate account is a good idea, what to look for in a business bank account and how to set one up in just a few clicks.

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What Is A Business Bank Account

A business has many of the same banking needs as an individual: it must be able to cash cheques, make deposits and withdrawals, pay bills and more. A business bank account allows a company representative or owner to perform these banking transactions under the businesss name. Business bank accounts offer many of the same features as personal bank accounts, but they have a few perks that may be of particular use to a business owner.

Canadas main banks offer a variety of business bank accounts designed for companies of varying sizes and financial needs. These include basic business accounts with no or low monthly fees but very few free transactions, as well as more costly business accounts for large corporations that may include additional features and unlimited transactions.

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Does A Sole Proprietorship Need An Ein

By Catherine Hodder, Esq. | Reviewed by Laura Temme, Esq. | Last updated October 27, 2021

Among the many advantages of a sole proprietorship is its simplicity. It is easy to set up. And there is less paperwork, especially when it comes to taxes.

As a sole proprietor, you file your business income and expenses on your individual tax return. Additionally, you use your Social Security number for your business activities.

But if you hire employees or open a business bank account, you may need an EIN.

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Benefits Of A Business Bank Account

Establishing a separate business bank account is an essential step in running your small business. While you may only have one personal bank account, your business likely needs multiple accounts.

According to the U.S. Small Business Administration, most business bank accounts offer benefits and perks that personal bank accounts do not. Here are four reasons why you need a business bank account.

For Each Bank Ask Yourself These Questions:

• Will you be able to maintain the required minimum balance each month so that you can save on monthly fees or even qualify for a free account?
• Do you want overdraft protection?
• Do you want a business credit card? Tip: ask if the bank will give you a preferred interest rate on a credit card thats paired with a business checking account.
• Do you want to earn interest on your business checking account?
• Do you want to open a business savings account, as well as a checking account?
• Will the bank give you preferred rates on long-term loans or a line of credit?
• What online services are available?
• What extras are available with your account? This could include sending invoices or receiving help with collecting payments.

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Opening A Business Current Account With Tide

We built Tide to make business simple, which is why you can open an account with us in minutes.

To open your business account, head here to get started and select whether youre opening an account for a registered company or as a sole trader:

On the next page, youll be asked to fill in some basic personal information about yourself and your business. Youll then be sent a link to download the app on your iOS or Android device. If you prefer, you can also download the app straight away and get started just as easily there.

When you open the app the first time, youll be asked to enter your email, take a picture of your ID, as well as a photo of yourself for verification. The approval process time frame varies depending on circumstance, but you will be sent clear instructions no matter the situation.

In most cases, it only takes a few minutes to have your account set up and ready to go. Your business card will then be sent to your business address in 2-4 working days.

Did you know you can manage all your business finances directly from the Tide app? Send and manage invoices, automatically follow-up and record payments, custom-label your income and expenditure, get paid by Direct Debit, and integrate with several accounting software platforms. Spend less time on admin and more time running and growing your business.

Setting Up A Bank Account For Your Llc

Before you decide where to open your bank account, its a great idea to shop around. Banks want to attract businesses, which means there are lots of options that you can choose from.

Carefully consider what services you need and how much youre willing to spend on monthly fees.

Many banks offer low-cost, or even free accounts for small businesses with few transactions each month. Expect to have a high volume of transactions? Be prepared to get a more expensive business checking account.

Just be sure to ask for a complete fee schedule from every bank youre considering so you can compare fees and make the best decision for your wallet.

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Cost Of Business Vs Personal Accounts

The first thing you’ll discover about business bank accounts is that they always cost more than personal bank accounts and typically pay less in interest on balances. However, there are some valid reasons for this :

• A business bank account is an asset owned by the business and as such if the business is sold, the bank account is included in the sale .
• Business accounts can have multiple signing authority – It is a common practice for businesses to have more than one person with signing authority on the account It is also typical for businesses to require dual signatures on some types of transactions. With a business account, you can also have different groups of signatories. For example, one group could be sole signatories and another group could require dual signatures. Note that online business accounts also support “dual signature” authority.

Fortunately, bank fees are a deductible business expense. When looking for a business bank account take the time to shop around, because there is quite a variance in the fees attached to business accounts, depending on the number of monthly transactions, the account balance, etc. Estimate the number of transactions you are likely to make in a typical month and the lowest balance you are likely to have and compare this with the bank’s fee schedule. Note that if your business does not need branch banking, an online business account can be less expensive.

When Is An Ein Required For A Sole Proprietorship

Per the IRS, A sole proprietor without employees and who doesnt file any excise or pension plan tax returns doesnt need an EIN. Once you hire employees or file excise or pension plan tax returns, you will immediately require an EIN.

A sole proprietor with an existing EIN who becomes a sole owner of a limited liability company will require another EIN for the LLC.

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Tips On Managing Finances When Self Employed

The most important thing a self-employed business owner can do to better manage their finances is to separate their business and personal finances. This step alone will give you valuable insights into how much youre actually making in your business. Thats because youll be able to see business income and most or all of your business transactions in one place, rather than guessing.

When you have your own business, another crucial step is to set up a proper bookkeeping system from the start, even if you are operating as an independent contractor or freelancer. Invest in accounting software and either take a class or hire someone to set it up properly for you. You can always hire a bookkeeper to help as your income grows, but having it set up right from the beginning will save you a lot of headaches.

This article was originally written on October 21, 2021.

Types Of Business Bank Accounts To Consider

As with personal banking, there are several types of business bank accounts. Depending on your needs, you’ll likely need to open more than one account.

Here are the four common types of business bank accounts:

• Checking account: A business checking account is a great choice for managing payroll, expenses and other basic financial tasks that keep your business running.
• Savings account: In addition to a checking account, you’ll likely need a business savings account to hold your earnings.
• Merchant account: If you plan to accept credit and debit card payments, check with your bank to see if you can set up a merchant account. “Depending on whom you bank with, some banks offer merchant services as well,” said Julia Spahiu, founder and CFO of Edi and Sienna Group. “I suggest to all my clients shop around before settling for one particular account, and renegotiate your rate at least once a year.”
• You can use a business credit card for emergencies or miscellaneous items for your business. The chief benefit of a credit card for the owners of startups or if one has bad credit is that it can help build or improve your business credit score.

Key takeaway: The four main types of business bank accounts are checking, savings, merchant and credit card accounts.

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Can I Use My Personal Checking Account For Business If I Have An Llc Or A Corporation

If you operate your business under a legal entity that is separate from you — such as an LLC or corporation — you are legally required to separate your company’s finances from your personal finances. While this doesn’t necessarily mean you need a business checking account, it does make the most sense, and some banks may require it if you’re applying as an LLC or corporation. What’s more, using a personal bank account for your business transactions can invalidate any limited liability you receive through the legal entity you’ve registered.

The Level Of Complexity Required

A sole proprietorship tends to generate smaller amounts of revenue and incur lower levels of expenses than more complex types of organizations. Consequently, it can make sense to start off with the most minimal accounting record keeping that is based on the cash flows into and out of a bank account. This means maintaining separate cash receipts and cash disbursements journals, and little else. This is considered a single entry accounting system, since it cannot be used to produce a balance sheet, only an income statement.

A single entry system is most suited to a cash basis accounting system, where revenues are recorded as cash is received, and expenses are recorded as payments are made. There is no attempt to track assets or liabilities, so there is no formal tracking of fixed assets, inventory, and so forth in separate journals.

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Makes Filing Taxes Easier

As a sole proprietor, you still have to report your income to Uncle Sam.

On Schedule C, line 1, you have to report your business gross receipts or sales for the year.

This effectively means you have to keep accurate track of your business sales. If youre banking your business and personal money into the same account, its harder to keep track of your business income. As a result, youre very likely to underreport or overreport your income when filing taxes.

Overreporting your income means you wont be able to take full advantage of tax deductions. Underreporting your income might raise the IRS suspicions, which might result in tax audits and possibly fines. In fact, you might find yourself needing the services of a money laundering defense attorney if you cant straighten out your taxes.

What Are The Accounting Principles For A Sole Proprietor

Sole proprietorships are businesses that are intimately linked legally and financially with their owner operators. When a sole proprietorship loses money, its owner takes a personal loss and when it earns money he is taxed on it as personal income. Accounting principles for a sole proprietorship should create enough of a division between a business owner’s personal and business finances to determine which expenditures are legitimately tax deductible. At the same time, a sole proprietor’s accounting system should integrate the connection between business and personal finances by tracking the flow of funds between different accounts.

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How To Open A Sole Proprietorship Bank Account

Related

• How to Open a Bank Account for an LLC

If your business is a one-person show, you can run it quite comfortably out of your personal bank account. There are advantages to opening a sole proprietor bank account instead, though. Most banks will be delighted to help you do so.

Tip

Find the bank that offers you the best deal. Take your personal identification and business paperwork to the bank and fill out the necessary forms. That’s all it takes.

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Do I Need A Business Bank Account For A Sole Proprietorship Absolutely

If youre still asking, Do I need a business bank account for a sole proprietorship? you now have adequate information that you can use to answer it. However, its clear your business needs its own account. There are drawbacks, yes, but the benefits win.

Need more small business tips and insights? Keep reading our blog.

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Advantages Of Using A Personal Account For Your Business

Many new businesses use their personal bank accounts at first, but in the long run, you have to consider your business as a separate entity. This means getting the business its own bank account. The benefits of using a personal account for a new business are:

• Banking is hassle-free.
• Personal funds can be used to obtain credit.
• No waiting for paperwork to go through.
• Can provide flexibility when startup costs are high.
• No need to visit a bank.
• Don’t have to prove anything to the bank staff.

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Accurate Cash Flow Management

While your bank balance is by no means the complete picture when it comes to your cash flow, separating business and personal finances makes it easier to manage and react to your current cash situation.

If you notice, for example, that your balance is running low, you can perform a quick cash injection. If you notice theres too much money lying dormant in your account, you can put it to better use elsewhere.

Its also easier to demonstrate your financial position when you maintain separate business and personal bank accounts. The clearer your financial records, the simpler it is to apply for funding from a lender or credit provider.

How Does A Business Bank Account Differ From A Standard Bank Account

With a business bank account, you can write cheques, make deposits, withdraw funds and pay bills online, just as you might with a regular account. However, business bank accounts often feature useful extras like a higher number of allowable transactions or an unlimited number of debit and credit card transactions . A business account might also include a higher overdraft limit or no minimum balance requirements. Some business bank accounts may even be designed for specialized businesses like farms or non-profit organizations.

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Is It Better To Apply In Person Or Online

Rampenthal said that some banks do not offer the option of opening a business account online, either to reduce the risk of identity theft or due to the nature of certain businesses.

Banks that do offer the option of applying for a business bank account online may take more time to review your documents and set up the account than they would if you applied in person.

If the bank you choose offers both application options, you’ll need to decide which option is more preferable: the convenience of applying online but waiting longer for your account to be set up or applying in person and having your account set up the same day.

Matt D’Angelo and Simone Johnson contributed to the reporting and writing in this article. Some interviews were conducted for a previous version of this article.