Opening a business bank account when you work for yourself

A separate business bank account is one of those pieces of advice that gets repeated so often it stops carrying any information. It is worth doing. It is also worth knowing why, because the usual reasons given are the weak ones and the strong ones rarely get mentioned.

Here is the honest version, including the part where it does less than people think.

Are you actually required to have one?

If you are a sole proprietor — which is most people reading this, and is what you are by default the moment you start working for yourself without forming anything — no federal law requires you to hold a separate business bank account. The IRS does not require it. Nobody is going to fine you.

What can require it is your bank’s own terms. Many personal-account agreements prohibit business use, and the practical consequence is not a lecture but a frozen account at an inconvenient moment. Worth reading once.

If you have formed an LLC or a corporation, treat a separate account as required even though the requirement is not written as a rule anywhere. An entity protects you because it is genuinely a separate thing from you. Running its money through your personal checking account is the clearest available evidence that it is not, and that argument — that the entity is a formality rather than a real separation — is the standard route to setting the protection aside. You did not pay a state filing fee to leave that argument lying around.

The account is not what protects you. It is the evidence that the thing which protects you is real.

What separating actually buys you

Three things, in descending order of how often they are mentioned and ascending order of how much they matter.

Bookkeeping time. The commonly cited reason, and the smallest. Instead of reading every line of a personal statement and deciding what it was, the business account is the record. Categorizing still takes work; sorting no longer does.

Deductions you can stand behind. A deduction is not stronger because it came out of a business account, but it is far easier to demonstrate. If anyone ever asks about a $340 charge, “it is on the business account, here is the invoice” is a two-minute conversation. Reconstructing the same answer from a personal statement two years later is an afternoon, and the afternoon usually happens at the worst possible time.

Knowing what the business actually earns. This is the one that changes behavior. When business income and personal spending share an account, the balance means nothing — it is two unrelated stories added together. A separate account gives you a number that is true on its own, and most people find the number is not what they assumed. Sometimes it is better.

The FDIC part almost nobody gets right

Here is a genuine surprise, and it cuts against the usual advice.

Deposit insurance is $250,000 per depositor, per insured bank, for each account ownership category. People reasonably assume a business account is a different category from a personal one, so opening one doubles your coverage.

For a sole proprietor, it does not. The FDIC insures an account held in the name of a sole proprietorship as a Single Account of the owner — the same category as your personal checking and savings — and adds them all together under one $250,000 limit. A “Doing Business As” account is, for insurance purposes, just another account of yours.

An LLC or corporation account is different. Those are insured in the corporation, partnership and unincorporated association category, separately from the owner’s personal deposits, provided the entity is engaged in genuine independent activity — meaning it exists to do business, not to manufacture insurance coverage.

Same person, same $260,000, two structures

$235,000 personal and $25,000 of business money, all at one bank.

None of which is a reason to form an LLC. The liability protection is the reason; this is a footnote to it. But if someone has told you that opening a business account spreads your deposit insurance, they were describing a different structure from the one you probably have.

You may need an EIN, and it is free

An Employer Identification Number is the business equivalent of a Social Security number. Most banks ask for one to open a business account, though many will open a sole proprietor account against your SSN instead.

Getting one takes about ten minutes on the IRS site and costs nothing. If the application is approved the number is issued immediately, on screen. The IRS says so on its own page, alongside a warning it evidently felt the need to print: you never have to pay a fee for an EIN. Every service charging forty or sixty dollars for one is reselling a free government form, and they buy search ads for exactly the term you are about to type.

Four things that trip people up:

• Form the entity first. If you are creating an LLC or corporation, register with your secretary of state before applying for the EIN, or the application can be delayed.
• One per responsible party per day. If you are setting up more than one thing, they go on separate days.
• The online tool is not open around the clock. It runs roughly 6 AM to 1 AM Eastern on weekdays, with shorter hours on the weekend, and it is a genuinely surprising thing to discover at midnight.
• Finish in one sitting. The application cannot be saved, and it times out after fifteen minutes of inactivity.

Even as a sole proprietor who does not strictly need one, an EIN is worth having for a reason that has nothing to do with banking: clients who need a W-9 get the EIN instead of your Social Security number. That is a small, permanent reduction in how many filing cabinets your SSN sits in.

What to look for in the account

Business banking is a competitive, unglamorous market and the differences that matter are boring ones.

• No monthly fee, or one you can actually clear. Plenty of banks waive it at a low balance. A fee you pay every month for an account holding float is a subscription to nothing.
• Free incoming transfers and a sane cap on free transactions.
• Sub-accounts, or the ability to open a second account free. This is the one people underrate. Tax money wants to sit somewhere it cannot be spent by accident.
• An export that is not a fight. CSV or OFX, downloadable without phoning anyone.
• FDIC insured. Some money apps are not banks; they hold your money at a partner bank, which usually works and is a different arrangement from the one you think you are getting. The FDIC’s BankFind tool settles it in seconds.

Cash deposits are worth a thought if you take any. A great many online-only business accounts cannot accept cash at all, which is fine until the week it is not.

Opening it, in about twenty minutes

1. Get the EIN if you want one. Free, immediate, irs.gov.
2. Collect what the bank will ask for: photo ID, the EIN letter or your SSN, and, if you have registered a trading name or an entity, the registration paperwork from your state.
3. Open the account — usually online, sometimes at a branch if you have an entity.
4. Open a second one for tax while you are already in there. It is thirty extra seconds now and it is the account that makes the set-aside percentage actually work.
5. Move the incoming payments over. Update the invoices you have not sent, then the standing clients, then the platforms.
6. Leave the personal account alone for a month. Something you forgot will land in it. That is the point of not closing anything.

Paying yourself, without overthinking it

Sole proprietors do not pay themselves a salary. You transfer money from the business account to the personal one, and that transfer is a draw, not a wage — there is no payroll and nothing is withheld. It has no effect on your tax, which is calculated on the profit of the business whether the money moved or not.

Which means the transfer is free to be whatever helps you: weekly, monthly, a fixed amount, a percentage. Most people find a boring fixed transfer on a fixed day is worth more than the flexibility it gives up, for the same reason a salary is calming even when the underlying income is not.

An LLC taxed as an S corporation is a different animal with actual payroll obligations. If that is you, this paragraph is where the guide stops and your accountant starts.

What to do this week

If you have been running everything through one account, the whole job is an evening. Get the EIN, open two accounts, point new invoices at the business one, and leave the old account running while the stragglers arrive.

The part that surprises people is not the tidiness. It is that a month later, looking at the business account tells you something true in about four seconds — and that the number was always there, buried in a statement that also contained groceries.

Questions, answered

Do I legally need a business bank account if I am a sole proprietor?

No. There is no federal requirement for a sole proprietor to hold a separate business bank account, and the IRS does not require one. It is a bookkeeping and evidence decision rather than a legal one. If you have formed an LLC or a corporation, the situation is different: keeping entity money separate from personal money is central to maintaining the liability protection the entity exists to provide.

How much does an EIN cost?

Nothing. You get an EIN directly from the IRS for free, and if the application is approved it is issued immediately online. The IRS states on its own EIN page that you never have to pay a fee for an EIN and warns about websites that charge for one. Those sites are reselling a free government form.

Does a separate business account double my FDIC insurance?

Not if you are a sole proprietor. The FDIC insures an account held in the name of a sole proprietorship as a Single Account of the owner and adds it to the owner’s other Single Accounts at the same bank, with the total insured up to $250,000. An account held by an LLC or a corporation is insured in a different ownership category, separately from the owner’s personal deposits, provided the entity is engaged in genuine independent activity.

Can I use my personal account and just keep good records?

You can, and plenty of people do for a first year. The cost is not a penalty, it is time and confidence: every statement has to be sorted by hand, and a deduction you cannot cleanly trace to a business account is harder to stand behind if anyone asks. Most people who switch say the surprise was how much less bookkeeping there was afterwards, not how much more organized they felt.

Sources

1. Get an employer identification number — Internal Revenue Service. Confirms an EIN is free and issued immediately online, the warning about sites that charge, the one-per-responsible-party-per-day limit, and the tool’s opening hours.
2. Your Insured Deposits — Federal Deposit Insurance Corporation. States that sole proprietorship accounts are insured as Single Accounts of the owner, and that LLC and corporation deposits are insured separately from the owners’ personal deposits.
3. Deposit Insurance At A Glance — Federal Deposit Insurance Corporation. The $250,000 per depositor, per insured bank, per ownership category limit.
4. Business structures — Internal Revenue Service. How the IRS classifies sole proprietorships, LLCs and corporations.
5. Self-employed individuals tax center — Internal Revenue Service. General recordkeeping obligations for the self-employed.

Looking for more?

Related guides

• Budgeting on irregular incomeThe bucket method a separate account makes possible.
• How much to set aside for taxesWhere the tax percentage should actually live.
• What you can actually deductCleaner records make every one of these easier to defend.

Elsewhere on BrassWell

• All guidesEverything we’ve written, in one place.
• Support CenterAnswers written the way these guides are.
• How BrassWell worksIncome, buckets, tax set-aside and invoicing.
• Ask us directlyA person replies, 9 AM–5 PM Pacific, Mon–Fri.

This is general information about bookkeeping and banking, not legal or tax advice. Whether to form an LLC, and what it protects, depends on your state and your situation — that one is worth an hour with an actual attorney. FDIC coverage for a specific set of accounts can be checked with the FDIC’s own EDIE calculator or by calling them.