Do I Need a Separate Business Bank Account for LLC?

separate business bank account for llc limited liability company

You go into business with your brother-in-law and start a bakery. You filed your LLC and successfully registered the business name. Your wife suggests you create a separate business account. 

But you choose your personal checking account instead.

Before opening the business, you bought the necessary equipment and supplies. 

However, your finances have become a tangled mess. You cannot decipher between your personal and business expenses. You regret not listening to your wife.

A business bank account for LLC helps you separate your personal and business finances. A business bank account also protects your personal assets in the event of a lawsuit. Also, you can find yourself in legal trouble if you fail to divide your business and personal assets.

This article will show you other reasons why a business bank account is paramount. Read on if you wish to know more.

Keep Creditors at Bay

Legally, you must open a business bank account as an LLC. Failure to do so could open up your personal assets to creditors if you incur business liabilities. Your private assets include:

  • Your home
  • Your car
  • Your personal account
  • Your individual investments

Creditors could seize any of these if they win a judgment against you.

Under normal circumstances, an LLC is responsible for business debts alone. An LLC safeguards your assets and prevents creditors from going after them. However, the mixing of personal and business expenses can lead to piercing the corporate veil. 

Piercing the corporate veil occurs when the courts hold individuals personally responsible for business debts or business malpractice. In either case, a creditor can petition for your personal assets to satisfy debts of the company.

A business bank account, on the other hand, preserves the division between your personal and business finances. Therefore, creditors could only petition for business assets alone.

Stay Organized

Having a separate account can help you manage your business finances. This is especially important for larger businesses. And, it's a useful step for first-time business owners who need to keep track of incoming and outgoing money. 

Having a separate bank account will break down business activity, such as:

  • Gross Revenue: The total sum of money received from customers in exchange for the product or service
  • Expenses: Liabilities and deductions, such as rent, payroll, material costs, etc.
  • Net Profit: Leftover profits after deducting liabilities from overall revenues.  

Tracking your revenues and liabilities will be a harder task without a different business account. A business checking account will also help you determine if your company will break even. This occurs when expenses equal business revenue.

Since many businesses operate at a loss in the early stages, you need an accounting method that can guide you in the proper direction. As a business, you must also implement basic accounting measures to record all finances. Note the following accounting methods that you must consider:

  • Inventory
  • Accounts payable
  • Payroll
  • Equity shares
  • Retained earnings

It will be impossible to record these accounting items with a personal bank account. Hire an accountant if you need further guidance on accounting practices. An accountant can also help you take advantage of tax savings strategies.

Tax Saving Strategies

A business bank account will help you stay organized until tax season arrives. This keeps your personal tax information and business tax information separate. The IRS views your business as legitimate if you have a separate bank account.

Failure to distinguish your finances could cause tax agents to view your business as a hobby instead of a business. Therefore, you could face a hefty bill for your business expenses. The IRS could also see your business as a hobby if you started your business and failed to make a profit in the beginning. 

Establishing a business account also helps you take advantage of lucrative tax savings as an LLC. For instance, an LLC can yield lower taxes than a corporate entity.

And, corporate owners are subject to double taxation. Corporate owners pay taxes at the business level and additional taxes on dividend income as well.

LLCs are not subject to double taxation. Instead, they operate on pass-through taxation. Pass-through taxation means income that passes from the LLC to the individual LLC owners. From there, the owners would note the income on their individual tax returns.

However, you could lose LLC tax advantages if you fail to organize your business finances accordingly.  

Business Financing

To get a loan or line of credit, financial institutions must also view your business as legitimate. Banks and lending institutions want to see that a business is professional and stable enough to satisfy loans and credit. 

Additionally, banks require that businesses maintain a separate business account before approving a loan. Having an LLC account also helps you keep track of any loans and credit on your bank.

Your business bank account will also help you pay back any loans in a timely manner. Any loan or credit in your personal name would muddy your finances and cause you to lose track of such factors as:

  • Regular payments
  • Remaining loan balances
  • Loan interest rates

When creating your accounting system, create a separate item for any loans or credit received for your business. 

Building Your Business Credit

Creating a business account also helps you create your own business profile. Paying bills and loans on time build your business credit profile.

And, it helps you establish solid relationships with banks and lending institutions. If you cannot gain access to loans or credit, a separate account could help you in the future. 

You can raise your business score by maintaining a credit account with vendors or suppliers. This bolsters the number of good payments to your credit profile, boosting your credit score over time.

A solid track record of positive payments will increase your chances of obtaining loans and credit. For more information on commingling funds, click on this article to read more.

The Importance of Business Bank Account for LLC

An LLC account protects your personal assets from court judgments. The courts could expose your assets to seizure if you mix personal and business assets. 

A separate business bank account for LLC will also help you keep track of your cashflow. Further, it will help you course-correct your business practices where necessary. And, a business account will help you gain access to credit and loans. 

Want to learn more helpful tips about business finances? Make sure you check out more of our blog in the Finance section to learn more about banking, financial management, incorporation, and cryptocurrency!

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