Have you ever wondered if you should have a separate bank account for your small business or personal side hustle? How can you tell when it would be required? How difficult is it to attain? There are many questions that need to be answered and there is no one-size-fits all answer. There are, however, some tidbits I can share to (hopefully) make it an easier decision.
When should you start a business account?
If you have a small business (say, on Etsy, for example) that earns more than $600 in a given year, then you will need to report that income on your taxes for that year. That is a threshold that I would recommend for when to have a separate business account. Depending on what your business does and how it is set up, you may not need an account in the name of the company, but you should at least have a separate checking account for the business inflows and outflows. That will make keeping track of the business finances much easier.
If you have a business with more than one owner (partnership, LLC, LLP, corporation, etc.) that is when I recommend that you get a business bank account in the name of your company. When it comes time to do taxes it will be much easier to have money flow through that business account and it also allows for some additional legitimacy in the eyes of paying consumers when they are sending funds into a company account rather than your personal account.
How hard is it to open a business account?
If you are the only business owner and you are planning to stay small, you can certainly open an account just in your own name and keep it separate from your personal finances. That is about the only situation where I would recommend doing so. Otherwise, you need to know the requirements that your local (or national) bank will most likely ask of you.
For an individual business where you are the sole owner, you would most likely be classified as a Sole Proprietor. All you would need is a tax ID number for your business and then the typical personal information/ID that is collected. I recommend naming your business at this point but it is not necessary.
For group businesses or individual owned businesses who have a little more complex structure, banks will require a tax ID for the business and whatever ownership documents there are for that. When you register an LLC or partnership you will need to have an agreement on file with the state you registered in. That would be required along with any group agreements that would list all owners of the company. If you incorporate you would receive similar documents when you go through that process as well.
Where do you even get a Tax ID?
Luckily, this is not hard at all if you know where to go. You can get one online and within minutes and it is free!
The link is here for the IRS Website.
To complete the online application you will need to know:
The address that will be assigned to the business
The Social Security number of the primary business owner
What type of business the company is classified as (sole proprietor, LLC, etc.)
What industry/goods/services the company would be classified under
In summary, I do recommend a business bank account to keep finances separate. You will need a tax ID for the business and the documents that list you and your partner(s) as owner of the company. It seems like a daunting and scary process but it can be tackled easily and can make things much easier.
I appreciate any feedback or questions. Thanks so much for reading and I will see you next week!