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Do you Need a Business Bank Account as a Sole Proprietorship?
by Fundid on Mar 15, 2023 2:54:55 PM
As a sole proprietor business owner, you may be wondering if having a dedicated business bank account is worth the expense and effort. The truth is that you don't need to have a separate bank account for your business as a sole proprietor, but it is recommended to separate your personal and business finances!
Having a dedicated account will help you stay organized with your finances and give much-needed insight into the financial activity of your business. Plus, it can save time and take away some guesswork during tax season. In this guide, we'll explain why having a business bank account as a sole proprietor for your small business is essential and how to go about setting one up.
What is a Sole Proprietorship?
A sole proprietorship is the simplest and most common structure chosen to kickstart a new business. This type of business organization is run solely by an individual who enjoys complete control over the company's operations, decisions, and profits. Unlike other business entities, such as corporations and limited liability companies (LLCs), a sole proprietorship does not require a formal registration process or extensive legal documentation.
The owner is responsible for all liabilities, debts, and obligations of the business, making it crucial to consider the risk factors associated with the venture. However, the flexibility and ease of setting up and managing a sole proprietorship can be appealing to many aspiring entrepreneurs looking to bring their innovative ideas to life.
Why Should you Have a Business Bank Account as a Sole Proprietor?
As a sole proprietor, you might be tempted to mingle your personal and business finances, thinking that it will save time and effort. While it is not legally required that sole proprietorships have a business bank account, there are many advantages to having one, even if you're running a small or seemingly uncomplicated operation. Let's look at the top three reasons a sole proprietorship should have a business bank account.
1. Easily separate your personal and business finances
One of the primary advantages of maintaining a separate business bank account is to keep your personal and business expenses separate. This separation not only allows for better financial management but also can help you manage your business financials accurately.
2. Have a clear picture of your business finances to obtain funding
If you are a sole proprietor and you are looking for business funding, having a business bank account can help you get approved. This is because lenders will often require that you have a business bank account in order to qualify for funding. Additionally, having a business bank account can help to show lenders that you are serious about your business and that you are organized and responsible with your finances.
3. Give your business professionalism and credibility
Additionally, having a business bank account lends your operation a level of professionalism and credibility, which is essential when dealing with clients, vendors, or potential investors. Setting up a business bank account as a sole proprietor provides you with financial clarity and ultimately makes for a more efficient and successful business endeavor.
Benefits of Having a Business Bank Account as a Sole Proprietor
Track your business transactions seamlessly
As a sole proprietor, when you have a dedicated business bank account, you will be able to track your business transactions seamlessly in one place without having to question where your business's money is being spent. This is important because knowing where your money is going can help you make informed decisions about how to allocate your resources. Gone are the days of having to separate your personal transactions from your business transactions!
Access additional banking services for your business
Another benefit of having a business bank account as a sole proprietor is that you can get access to a variety of financial services that can help your business grow. For example, many banks offer merchant services that allow you to accept credit card payments from your customers.
Makes bookkeeping easier
When running your business, having a dedicated business bank account can make bookkeeping easier. When all of your business-related income and expenses are in one place, it can be simpler to track and manage them. This can be especially helpful come tax time.
Tips for Selecting the Right Bank Account for Your Business as a Sole Proprietor
Location
When choosing a bank for your business, one of the first things you should consider is location. Can you do all of your business banking online, or will you need a physical location to make cash deposits? If you are able to do your business banking 100% online, NorthOne and Lili are two great options to consider as a sole proprietor looking for a business bank account.
Types of Business Bank Accounts Offers
Are you looking for a bank that offers both a business checking and savings account? Maybe you need a merchant account as well for credit card transactions. Understanding the different types of business bank accounts that exist can help you understand how you want to manage your business finances and help you choose which banking institution is right for your business.
Related Reading: Best Online Business Checking Accounts
Customer Service
As a sole proprietor, your time is limited, and you will want to consider the customer service offered by the bank when choosing one for your business. This includes things like how easy it is to get in touch with someone at the bank, hours of operation, and methods of communication. You will want to choose a bank that meets your needs when it comes to customer service.
Fees
When choosing a bank for your business, you will also want to consider the fees that they charge. Many banks charge monthly fees, ATM fees, and other fees that can add up over time. Be sure to ask about all the fees that the bank charges so you can compare them and choose the one that is best for your business.
How to Open a Business Bank Account as a Sole Proprietor
To begin the process, start by researching institutions that offer business bank accounts that will cater to your specific business needs. Do they have integrations to other software programs your business is using? Do they have a mobile application so you can manage your money from anywhere? How easy is their application process?
Once you have shortlisted your preferred bank, gather the required documents such as:
- Your Social Security number
- Business license or tax identification number
- Government-issued photo identification
Of course, the required documents will vary by the banking institution.
Finally, complete the account opening process by filling out the application form with accurate information and submitting the necessary documents. Soon, you will have your business account up and running, helping you efficiently manage your finances as a sole proprietor!
Tips to Manage Your Finances With Your New Business Bank Account
Taking control of your financial future is essential when as a business owner. Once your business bank account is established, it's important to transfer all recurring purchases from your personal account to ensure a clear separation of business and personal expenses. This move allows for efficient management of your finances while reducing confusion during tax season.
If you don't have a budget in place for your business yet, now is the time to make one! This practice will help you notice any areas of overspending and give you an overall understanding of your business's cash flow.
So keep these tips in mind, and step confidently into your new financial chapter, attaining both stability and success for your entrepreneurial venture.
Related Reading: 5 Financial Accounts to Help Manage Your Business Finances