Why A Business Bank Account Is A Sole Proprietor’s Best Friend

By Levi King

Picture this. It’s the early 2000s, and Who Wants to Be a Millionaire plays at low volume on a small TV in the background. My beautiful wife, Rachel, and I are seated in our living room. I’m a young business owner, and in spite of some pessimistic prognostications by a few concerned family members, business is booming. In one short year, I’ve made enough money to finance at least the upcoming birth and care of our first daughter, and I did it by dropping out of college to follow a dream (okay, getting expelled).

Sounds lovely, doesn’t it? But here’s the kicker: Rachel and I are surrounded by hundreds of receipts. Boxes of them. Envelopes stuffed to the gills with records of all our purchases over the last nine months.

The idyllic scene has now turned into a nightmare that I had helped create.

Two Personal Bank Accounts Are Better Than One

At the beginning of the year, my accountant had recommended that I remain a sole proprietor because he didn’t believe I’d make enough money out of the gate to justify incorporating. As I’ve written elsewhere, that turned out to be a very expensive mistake.

I didn’t open my first dedicated business checking account until 2001. It was only then that I saw how much hassle I could have avoided had I at least opened a second checking account as a sole proprietor and deposited all my business earnings there. Technically, it would have been just another personal account with my DBA/ABN attached, but that wouldn’t have mattered come tax time.

The whole question of business versus personal finances would have been reduced to black and white instead of the motley shades of all those receipts littering my living room floor.

More articles from AllBusiness:

Why You Need a Business Bank Account Even for a Sole Proprietorship

Here are just a few examples of the benefits of keeping a separate bank account for business purchases:

• It helps build fiscal discipline. Building discipline around anything essentially involves taking just one more step than you’re used to while in pursuit of a goal. If your goal is to be able to do 100 push-ups and your maximum is 10, the day you force yourself to pump out that eleventh pushup is a good day. The same goes for your finances. Opening a second account for business earnings may be one more step than you’re used to, but you’ll feel better about it with each new deposit.
• It clarifies how your business is doing. When your personal and business finances are mixed, it creates a lot of noise around the question of whether your business can stand on its own two feet. With a business account, the numbers never lie; you see exactly what you are spending and earning to build the business. You see whether you’re managing your expenses according to sound business principles versus the often hectic style in your life as a consumer.
• Assuming you open a business credit card or line of credit attached to the checking account, it helps build business credit. An account dedicated to business is not only a sign that you mean business—it simplifies the process of reporting your progress to the credit bureaus and prepares you for the kinds of financing that will become available as your business grows and you incorporate.
• The kinds of financing you qualify for as a sole proprietor are limited, but even those will be cut off as an option entirely with most commercial lenders if your finances are mixed.

Opening a Business Bank Account Is Easier Than Ever

Looking back, the solution to my receipt nightmare was an easy one. It involved an extra trip to the bank and a little more paperwork, but that sacrifice would have meant nothing compared to the headaches Rachel and I endured later.

Business owners today have even less excuse than I did for not separating their business and personal finances; thanks to the internet, you can open up a new account from the comfort of home.

So what are you waiting for? Start the new year off right with a bank account dedicated solely to the business of your business. It is a decision that has literally zero disadvantages, while the advantages can be long-lasting and widespread.

About the Author

Levi King is CEO, co-founder, and chairman of Nav.com. A lifelong entrepreneur and small business advocate, Levi has dedicated over ten years of his professional career to increasing business credit transparency for small businesses. After starting and selling several successful companies, he founded Nav both to help small business owners build their credit health and to provide them with powerful tools to make their financing dreams a reality.

RELATED: How Do Owners of an LLC or S Corporation Get Paid?