Business Bank Account: Does a Sole Proprietor or LLC Need One?

Does a freelancer, sole proprietor or LLC need a separate business bank account?

Federal tax law does not require a sole proprietor or a single-member LLC to have a separate business bank account. The IRS still tells new business owners to open a business checking account early and keep it separate from the personal one (Publication 583), and to keep a separate bank account for the business (Publication 334).

What the law does require is records. A person subject to income tax must keep books or records sufficient to establish gross income, deductions and credits (26 CFR 1.6001-1). Except in a few cases, the law does not require any specific kind of records (Publication 583), but the business checkbook is the basic source for recording business expenses. With a separate account, the statements are the starting point for the books. With a shared one, each transaction has to be sorted by hand before a return can be prepared, and a preparer receives one tangled account.

A loan agreement or an LLC's operating agreement may add its own requirement, and state law may add rules this page does not cover.

A case is not simple if:

• business and personal money are already mixed, or the mixed months are already on a filed return,
• a preparer is waiting on one account that mixes everything,
• a bank has closed or refused an account,
• the LLC has more than one owner, spouses included,
• you run more than one business, which needs a complete and separate set of records for each (Publication 583), or
• the LLC's liability protection matters to you because of a lawsuit, a large debt or a personal guarantee.

Those cases turn on judgment about each entry; the last section shows where to go.

Gather before you start: the state's filed formation papers (for an LLC), the IRS notice showing the EIN, any DBA or trade-name registration, a government photo ID, and statements from every account that has carried business money.

Can a sole proprietor open a business bank account without forming an LLC?

Generally yes. A sole proprietor is an individual who owns an unincorporated business alone (IRS), and the business has no existence apart from the owner (Publication 583). No LLC is needed under federal tax law, and the bank sets what it asks for. The SBA lists an EIN, or a Social Security number for a sole proprietorship, as the identification number banks ask for (SBA).

To put a business name on the account instead of your own (a DBA, short for "doing business as", also called an assumed name or trade name), check whether your state requires you to register it; the SBA says most states do for a name other than your own (SBA). Where that happens depends on the state; in Texas, a sole proprietor using an assumed name files a certificate with the county clerk (Texas Secretary of State). Ask the bank how it wants the name documented.

A sole proprietor's account helps the records, not the liability. The business is not a separate legal entity, and its liabilities are the owner's personal liabilities (Publication 583; SBA).

Does a single-member LLC need a business bank account?

No federal tax rule requires it, but an LLC's account does more work than a sole proprietor's. For income tax, a single-member LLC is generally disregarded, meaning it is not treated as separate from its owner: its activity goes on the owner's own return, for a business usually Schedule C, the business profit-or-loss form filed with Form 1040 (IRS). Under state law, the LLC is a separate entity, and its members are generally not personally liable for its debts (Publication 583).

A separate account makes it easier to show which money belongs to the LLC. Put the LLC's receipts into it and pay the LLC's costs from it. For employment tax and certain excise taxes, the IRS treats a single-member LLC as a separate entity and requires its own name and EIN (IRS).

Does mixing personal and LLC money weaken the LLC's liability protection?

It can, but no federal source says when. The SBA says an LLC protects owners from personal liability in most instances (SBA), and it ties limited personal liability protection to keeping business funds separate from personal funds (SBA).

Whether a court looks past an LLC is a question of state court law. Neither the IRS nor the SBA gives a test, so keeping the money separate does not guarantee protection. The practical steps are within the owner's control: LLC receipts in, LLC costs out, and owner money moved by labelled draws and contributions.

If a lawsuit, a large debt or a personal guarantee is involved, ask a lawyer licensed in the state where the LLC was formed. Past mixed months are covered in fixing mixed business and personal funds.

Do I need an EIN to open a business bank account?

Not always. An EIN (employer identification number) is the IRS's number for a business. A sole proprietor can usually open an account with a Social Security number, a single-member LLC may be asked for an EIN, and an LLC with more than one member or a corporation needs one. An EIN is free directly from the IRS and comes in minutes online (IRS).

The IRS's EIN page lists any LLC among the entities that need an EIN, while its single-member LLC page says a disregarded LLC with no employees or excise tax does not. A bank that asks for an EIN is reason enough to apply. A US disregarded LLC wholly owned by a foreign person needs its own EIN to file Form 5472, and the owner's contributions and distributions can make that form due (Form SS-4 instructions; Form 5472 instructions); see foreign-owned single-member LLC filing.

A husband and wife who own an LLC together as community property may treat it as a partnership or as disregarded, and the IRS accepts either (Revenue Procedure 2002-69). Confirm which treatment your return uses.

Form the LLC with the state first; the steps are in what to file after you form your company. Enter the name as it appears on the formation documents. The IRS accepts only letters, numbers, hyphens and ampersands, so the name on the EIN notice can differ slightly from the filed name; show the bank both (IRS). The online application needs a US or US-territory principal place of business and the Social Security number or ITIN of the person in charge of the entity; an EIN does not replace that number (IRS: Get an EIN). Without one, the IRS takes applications by fax (about 4 business days) or mail (about 4 weeks), so start early.

What does the bank ask for when opening a business account?

A bank must collect identifying information before it opens an account and verify it within a reasonable time, and it may ask for more. The federal minimum is a name, a date of birth for an individual, an address, and an identification number. For a US person that is a taxpayer identification number. For a non-US person it can be a taxpayer identification number, a passport number and country of issuance, an alien identification card number, or another government photo ID showing nationality or residence (31 CFR 1020.220). For a customer that is not an individual, a bank may verify with documents showing it exists, such as certified articles of incorporation, a government-issued business license or a partnership agreement. The SBA lists the most common asks as an EIN (or a Social Security number for a sole proprietorship), formation documents, ownership agreements and a business license (SBA).

The bank may also ask for a Form W-9. For a single-member LLC that is disregarded and owned by a US person, the form uses the owner's name and taxpayer ID, not the LLC's EIN; a foreign owner gives a Form W-8 instead (Form W-9 instructions). Details are in US business addresses and bank accounts.

When the customer is an LLC, a corporation or a general partnership opening its first account at that bank, the bank must also identify the people behind it: each individual who owns 25% or more of the equity, and one individual who controls or manages the entity (31 CFR 1010.230). In a single-member LLC, the owner may be both. For later accounts at the same bank, FinCEN lets the bank reuse what it has unless the information looks unreliable or its risk checks call for a new review, and the bank may still ask each time (FinCEN order FIN-2026-R001). A sole proprietorship is not on that rule's list of legal entity customers.

The bank's owner questions are separate from FinCEN's beneficial ownership report, which no longer applies to companies created in the US (FinCEN).

When should I open the business account: before the first client payment?

Before the first client payment or the first business purchase. The SBA says to open a business account as soon as you start accepting or spending money as the business (SBA), and Publication 583 lists it among the first things to do (Publication 583).

For an LLC, the order is:

1. File the formation papers with the state.
2. Get the EIN.
3. Open the account in the LLC's exact name.
4. Put the account on invoices and payment settings before the first invoice goes out.

A sole proprietor skips step 1, and step 2 unless the bank or the tax rules call for an EIN. Once the account exists, customers can make checks out to the business instead of to you (SBA).

Until the account exists, record where each deposit came from (business income, your own funds or a loan) and keep the deposit records; Publication 583 describes this habit for the business checkbook (Publication 583). For a sole proprietor or single-member LLC, costs you paid personally before the account existed are generally recorded as money the owner put in; with two or more owners the treatment can differ. See startup costs paid before the LLC had an account.

How do I pay myself from a business account without breaking the books?

A sole proprietor, or the owner of a single-member LLC taxed as one, moves money to themselves as an owner's draw: a transfer to the personal account, recorded in a drawing account and never as an expense. A sole proprietor is not an employee of the business, and the IRS says you cannot deduct your own salary or any personal withdrawals (Publication 334). Personal, living and family expenses are not deductible either (Publication 334).

Publication 583 says to write checks payable to yourself only for personal withdrawals from the business. Publication 334 describes the drawing account as the separate account that records business income withdrawn for personal and family expenses.

1. Label each transfer to yourself as an owner's draw.
2. Pay personal bills from the personal account only. A personal bill paid straight from the business account is also a withdrawal, and it has to be found and sorted later.
3. Move money into the business the same way and label it as the owner's investment.

Entries are in recording an owner's draw and LLC equity accounts. An LLC taxed as a partnership or corporation pays owners differently; see how LLC owners pay themselves.

Which cards and payment accounts should move to the business account?

Every channel that carries business money. The SBA lists checking, savings, credit card and merchant services accounts as the common business accounts, and says a payment processor must still be connected to a business checking account to receive payments (SBA).

For a sole proprietor or single-member LLC, business costs on a personal card are generally recorded as paid by the owner; with two or more owners or a corporation it can differ. See business expenses on a personal credit card.

What if my money is already mixed, or the bank closed my account?

The usual order is to stop the mixing, open the right account, then sort the past months. A closed account does not erase the records: its statements are the main source for the sorting. Publication 583 accepts legible account statements as proof of payment, but proof of payment alone does not establish a deduction, so keep invoices and receipts too (Publication 583).

1. Open the new account in the correct name with the formation papers, the EIN notice and your ID.
2. Move new money to it: invoices, payouts and recurring bills.
3. Download every statement from the old account, and from any other account that carried business money, before online access ends.
4. Pick a cut-over date. Money after it should only touch the new account. Everything before it needs sorting between business and personal.

The closing notice and the account agreement are the first place to look for the bank's reason. Names that differ between the ID, the EIN notice and the formation papers are worth fixing before applying again.

A long mixed period is where judgment calls pile up: whether a payment was income or an owner's loan, whether a card charge was a business cost, and how the draws are booked. The full cleanup is in fixing mixed business and personal funds; client payments that already landed in a personal account, including checks made out to the business, are in business income in a personal account; and books that are months behind are in catching up on overdue books.

Example

These examples are illustrative; amounts are in US dollars.

A freelance designer without an LLC

A freelance designer in Texas invoices US$60,000 over the year and takes every payment into personal checking. At tax time the account holds about 400 transactions: rent, groceries, software and client payments. Each must be sorted before the business income and expenses can go on Schedule C. She did not need an LLC to open a business account. Her Social Security number and photo ID are the usual starting point, plus a county assumed-name certificate if she wanted the account under a trade name. With a business account from the first invoice, the bank export would be a starting point for her profit and loss report, with fewer personal items to remove. For this year, the 400 items still need sorting.

A single-member LLC that still pays for groceries

An owner forms a Wyoming single-member LLC with no tax election, gets an EIN, and still pays rent and groceries from the LLC account. The LLC exists on paper, but the records do not show which money is the LLC's and which is the owner's. Whether a court would respect the separation is a state-law question. Going forward, personal bills come from the personal account, and the owner moves a labelled draw of US$4,000 a month to it.

A bank closes a mixed account

A bank closes a consultant's mixed account in March. She opens an account in the LLC's name with the filed formation papers and the EIN notice, then changes the payment details on her invoices and her processor's payout setting. The new account starts clean at its opening date. January to March, which sat in the closed account, still needs sorting, and she downloads those statements before her online access ends.

Different for you?

• Business and personal money have been mixed for a year or more, or the mixed months are on a filed return: sorting every entry takes judgment. Start with fixing mixed funds and business income in a personal account, and get bookkeeping help.
• A bank closed your account, or you must hand a preparer one tangled account: the books have to be rebuilt from statements. See catching up on overdue books and get bookkeeping help.
• Customer or marketplace payments go to a spouse's or relative's account or payment app: see payment app tax forms for someone else's sales.
• You own rental properties or several LLCs: see a separate account for each rental property.
• Your LLC has more than one member, or elected to be taxed as a corporation: see how LLC owners pay themselves.
• You just formed the LLC: see what to file after you form your company and new LLC bookkeeping setup.
• You live outside the US, or have no Social Security number: the bank decides what it accepts within the rule above; see US business addresses and bank accounts.
• You are deciding whether to keep the books yourself: see doing your own books or hiring a bookkeeper.