Introduction
Side hustles have become very popular over the past several years due to the rise of the gig economy, allowing people to earn additional money, explore interests and hobbies, or test out running a business without a full commitment to entrepreneurship. Some examples of side hustles include freelance writing, graphic design, selling homemade crafty items, or starting a drop shipping business, to name a few. Many people operate their side hustles without a formal flow, and they may even use their personal bank accounts for both personal and business transactions. While operating in this informal manner may seem convenient at first, your personal and business input should be distinctly different. One of the most essential things you can do to create that difference is to obtain a business bank account. This paper will discuss in detail some of the reasons why you should consider having a business bank account if you are operating a side hustle and look at the legal requirements, compliance, financial management, and long-term goals and implications.
Legal and Compliance
Like any business operation, side hustles are subject to local, state, and federal regulations, all of which you must remain in compliance to and with. Using a business bank account will assist you in ensuring your financial practice are in compliance with the law.
Business Entity and Legal Structure
If you’re a sole proprietor your business income is legally the same as your personal income. If you create an LLC or corporation it’s important to keep your finances separate so you can maintain the legal protections that an LLC or other entity type gives you. If you mix personal and business expenses you may have a court “pierce the corporate veil,” which holds you personally liable for the business debts.
Tax Compliance
Taxes are a primary reason for keeping a separate business account. Having a business account makes record keeping much easier. It allows you to track your income, deduct your expenses, and file your taxes accurately. The IRS recommends keeping your personal and business finances separate for better compliance, and to reduce audit risk.
Professionalism and Credibility
Even if your business is only a side hobby, how you present yourself to your clients, vendors, and lenders is important.
Building Trust With Your Clients
Having a business bank account allows you to accept payments in your business name versus your personal name. If clients think you are a legitimate business they are likely to take you seriously.
Credibility with Vendors and Financial Institutions
Banks and vendors often will not grant credit or favorable terms unless you already have a business account set up. Without a business account, you will have difficulty establishing business credit, obtaining loans, qualifying for merchant accounts, and accessing payment processors.
Organized Accounting and Financial Tracking
Without an established boundary between your side hustle and your personal life, managing the finances of your side hustle can be messy.
Accuracy in Bookkeeping
A business bank account will improve your bookkeeping by keeping all your income and expenses in one account. Having business finances separated from personal finances creates an automatic scale on the likelihood of human error. Furthermore, all accounting software tools will be simplified for reconciliation, the preparation of financial statements, and assessment of the overall viability of your business.
Easier Tax Preparation
With an account focusing only on the transactions of your side hustle, your stress will all but evaporate when preparing for tax season. You can easily provide your accountant or tax preparer with the documentation they need, and they will all be listed on one bank statement page. Since all your expenses are in one account, it will be straightforward for you and your accountant, as well as responding to an IRS inquiry if it comes to that.
Financial Assessment and Planning
If you are serious about growing your side hustle, you must have a thorough understanding of your cash flow. A business bank account provides clarity, which allows you to determine profitability, create a budget, and make smarter choices on matters of the company.
Access to Financial Products and Services
Once you open a business bank account, it serves as an entry point for a plethora of financial services and products that are designed specifically for your business needs.
Business Credit Cards and Loans
Having a relationship with a bank via a business account may give you greater access to credit. Often, business credit cards and business loans have better terms and even higher available limits, and they help build a credit profile for your business.
Merchant Services and Payment Solutions
A number of payment processors will require a business bank account. Services such as PayPal, Stripe, and Square will all have business specific features that only work if you connect a business account, so they may have tools for invoicing and tracking customers and doing advanced reporting, etc.
Integration with Business Tools
Business accounts can connect directly to many financial management programs and apps to help streamline your business operations. This can include invoicing, inventory management, customer relationship management (CRM), etc.
Separating Personal and Business Finances
Separating account dollars and record keeping is not just about compliance and organization. It is a very important practice for protecting your personal financial health.
Avoiding Commingling
When managing different pool funds; personal and business, it can lead to ambiguity, missed deductions, and court problems. A separate business account allows you to track dollar for dollar income and expenses generated by your side hustle.
Liability Protection with Personal Funds
If there was ever a lawsuit with the side hustle, have separate accounts could provide proof that the business is a separate entity, keeping your personal funds protected.
Scaling and Business growth
Some side hustles start as small projects, but most successful ones grow into full time businesses. A business bank account is the first step in growing the business.
Of Developing for Growth
As the side hustle becomes more successful the transactions generally become more complicated and higher in volume. On a business account, you will have scalability and will be able to manage more activity compared with a personal account.
Investors and Partners
Should you ever want to take in investment money or consider a partner, having clean and confirmable records is imperative. The keys to having the capability show transparency and well managed money, is to have a business account.
Strategic Planning
With visibility into your finances, you can effectively plan future investments, marketing strategies, and expenses. Having a financial plan is imperative to achieving the next step and creating a viable business rather than simply a side hustle.
Peace of Mind and Work-Life Harmony
Most importantly, having business vs. personal finances leads to peace of mind and better work-life balance.
Eliminate Stress
When you have your business finances organized and under control, it eliminates stress when you need to report your finances for tax season or when you have unexpected financial glitches arise.
Clarifying Income
Having a designated business account gives you a clear idea of how much your side hustle is making, helps you set benchmarks, and will allow you to track your growth to understand when you are ready to move into full-time self-employment.
Managing Time Better
With your finances streamlined, you spend less time untangling transactions and more time growing your business or enjoying your time.
Conclusion
Opening a business bank account makes good sense, even as a side hustler. It makes you more professional, ensures you stay compliant, makes your finances easier to manage, and enables future growth. Surely, opening a bank account feels like more administrative work, however, this is a foundational practice that could determine the future of your side hustle. Whether you are making a bit of extra cash, pursuing a passion or creating a full-fledged business, treating your side hustle seriously and establishing it with a business bank account is how you can get started. Establishing a separate business bank account demonstrates you mean business (pun intended), you have your priorities in the right order and you are set up for success, however big or small that whole process will be.

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