When To Open a Business Bank AccountMarch 2018 / Share
Many businesses start small, so small that any early income is treated more like a little extra spending money for the owner's personal use. But if you want to get serious about starting and growing a business, you need to upgrade from a standard bank account to a business account. This will provide many more options and a greater degree of flexibility in managing your money, without limiting your growth potential.
Access to business tools
Once you open a business banking account with the right institution, you'll gain access to many more tools and services than a standard checking account would have - everything from treasury management to business lines of credit and more. But besides these perks, opening a business bank account is equally important from a legal perspective.
Taxpayers are required to report all income from the prior year in their tax returns to the IRS. But the agency recognizes that some people earn money from activities that are more like hobbies than businesses. There is nothing wrong or illegal about making some extra money through a hobby, but the IRS does take issue if people pass this income off as business earnings, or use their hobby to apply for business tax deductions.
Although the line can be fuzzy, the IRS distinguishes between a hobby and a business for tax purposes. Some of the following information factors into the distinction:
- Whether the activity is done primarily for profit, rather than recreationally. If the time and effort put into the activity is significant, the IRS may consider it a business subject to applicable laws.
- If you "carry on the activity in a businesslike manner and maintain complete and accurate books and records," the IRS would designate it as a business.
If your income meets the qualifications of a business but you aren't utilizing a business bank account, it could cause problems. Likewise, if you are intent on running a successful business but are not separating your personal finances from it, accurate accounting becomes much more difficult. In short, it may be better to err on the side of caution and open a business account.
Another reason to upgrade to a business bank account is if you want to incorporate your business . Even if you work on your own and don't plan to hire employees, incorporation comes with many benefits:
- Incorporated businesses have limited liability, which in some instances can protect your personal assets in the event of a lawsuit.
- You can take advantage of various tax deduction and deferral rules as an incorporated entity.
- It becomes easier to grow your business through new employees, property or investors once it is incorporated.
Of course, the main caveat to incorporation is that you must have a business bank account for all related income and expenses. With these examples, it's easy to understand why the time to upgrade to a business account should come sooner rather than later.
Talk to your local Vectra Bank to learn more about your options when opening a business bank account.
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The information provided is presented for general informational purposes only and does not constitute tax, legal, business or investment advice.