Do I need a business bank account if I am self employed?

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At the onset of a new business venture, you may have numerous questions, such as:

  • How will my business make money?
  • Does my business need employees?
  • Does my business need startup capital?

Another question you may ask yourself is, “Do I need a business bank account if I am self-employed?”

The answer almost always points to yes. Experts recommend that you open a separate business bank account across different categories of self-employment. 

Types of Self-Employment

Self-employment comes in many different shapes and forms, though the two most common identifiers are classified as sole proprietorships and corporations. 

  • Sole Proprietorship: A sole proprietor is an individual in business for themselves, who does not have a business established as a separate entity. This means the IRS won’t look at the funds created by your business separately from what you’ve elected to pay yourself individually. Instead, it will look at it as a collective sum reported at tax season as your overall income for the year.
  • Corporation: Corporations can be broken down further into LLCs, S Corps, C Corps, non-profits, and other types of entities. Unlike sole proprietorships, corporations are established as separate from an individual. This means the IRS recognizes that corporation as its own standing entity and will look at the funds generated by the business as well as the wealth claimed by the business owner separately.

Do I Need a Business Account If I Am Self-Employed?

Now that we’ve established the two different types of self-employment, it’s important to note that having a business account as a self-employed individual can be beneficial regardless of your self-employment status. Here are the reasons:

Advantages for Sole Proprietors

For a sole proprietor, having a business bank account can help you track and write off your business transactions much more easily, especially if you can create a system where you use different debit or credit cards for business transactions than for personal transactions.

In the event of a tax audit, a sole proprietor could risk the IRS considering the collective wealth of his, her, or their personal and business finances. This means that tracking expenses separately and compiling all of your business-related write offs in an account dedicated to your business can help with your financial accounting year over year.

Advantages for Corporations

Many of the same elements of tax reporting apply to incorporated businesses, but the extra layer of protection by having a corporation might be another reason to open a bank account if you’re self-employed. 

Separating your business and personal banking can be beneficial. For example, you may be able to avoid muddying the waters on what you spent on your personal behalf versus the transactions you claimed as business related. 

Keep in mind that when you are an incorporated business, the government looks at your business as a separate entity. Therefore, doing anything and everything possible to show how your business operates separately from your personal wealth, including opening a bank account dedicated to your business, is helpful.


Admin

Hi there! This post exists to offer you (hopefully) useful information but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.

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