Key Takeaways
- Sole proprietors are not required by law to have separate business bank accounts
- However, all other entities (including LLCs) are
- Even if not required, a separate business checking account can benefit your practice
A business checking account for your therapy practice makes it easier to do your bookkeeping, track deductible expenses, and measure your financial performance.
And if you want to benefit from the protection offered by a limited liability company (LLC), a business checking account is not just beneficial—it’s required.
Here’s how to decide whether you should open a separate bank account for your private practice, plus some of the best business checking account options for self-employed therapists.
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Do I need a separate bank account if I’m a sole proprietor?
If you’re a sole proprietor, you don’t need a business bank account in order to run your practice. But having one comes with major benefits (more on that in a moment).
Having a separate bank account is especially helpful when you file your tax deductions on Schedule C of Form 1040. In the event of an audit, you’ll need to justify every business expense you’ve claimed on Schedule C. It can be difficult untangling personal expenses from business expenses when you don’t have a business checking account to keep them separated.
Do I need a separate bank account for my LLC?
If you plan to form an LLC (and possibly elect S corporation status), a separate business bank account is essential.
The LLC business structure shields you from personal liability for business debts and bankruptcy. That protection is conditional, however. It’s only effective if you keep your personal and business finances separated.
When both types of finances intermingle in the same bank account, you put yourself at risk. In the event you default on a debt and the creditor makes moves to collect, they can go after your personal as well as your business assets—since, for all intents and purposes, the two are indistinguishable.
The benefits of a business checking account for sole proprietors
If you’re a sole proprietor, you’re not required to open a business checking account. But doing so comes with three major benefits:
- Accurate bookkeeping
Most accounting software—as well as all-in-one, done-for-you platforms like Heard—automatically import transactions from your bank account and record them on the books.
That takes the heavy lifting out of bookkeeping. Rather than going through your bank statements or receipts and painstakingly creating a bookkeeping entry for each one, you can rest assured that they will show up automatically on the books. (And, if you use Heard, they’re categorized for you.)
When your personal and business transactions are all mixed together in one account, separating the two for the sake of bookkeeping becomes a real hassle. In fact, it’s probably more work than simply transcribing them by hand. And it can lead to bookkeeping errors that mess up your financial statements and turn tax season into a headache.
- Audit insurance
In the event your practice is audited by the IRS, the auditors will require a full financial history of your business, plus records to back up any tax deductions you’ve claimed.
If you’ve kept up with bookkeeping and saved your receipts, an audit is relatively easy to manage. You have on hand all the information the IRS needs.
On the other hand, if you’ve fallen behind, you’ll have to take some time getting all your information together. It’s very complicated and time-consuming to do so when your personal and business finances are mixed together in the same account. In many cases, small business owners have to hire accountants to help with the task.
A business checking account makes the process simpler and protects you from administrative chaos in the event of an audit.
- Maximize your tax deductions
In order to deduct eligible business expenses from your taxes, you need to accurately track them.
Accurate bookkeeping makes it easier. So does a separate business checking account dedicated to paying expenses related to your business.
If your personal and business finances are combined in the same account, you may be missing out on deductions that could reduce your tax bill: Transactions slip through the cracks, and some may be miscategorized.
And if you bring your bank statements to an accountant so they can sort out the mess for you, expect to pay extra for the privilege.
The simplest solution? A separate bank account dedicated to your business.
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The best business checking accounts for therapy practices
These are some of the best options for small business checking accounts.
Each one is a financial services platform, with the backend—where funds are held and transferred as needed—handled by an FDIC-covered bank. You can open an account online—often in fifteen minutes or less—and do all your banking through an online portal or app.
We may be biased, but we believe Heard Banking* is the best choice for therapy practices. It’s the only banking platform designed specifically for therapists, and it integrates directly with Heard’s bookkeeping, accounting, and tax prep platform.
But have a look through this list and take some time to consider each platform’s features before you make a decision.
Summary
- If you’re a sole prop, you’ll need a business checking account before you can operate as an LLC or any other business structure
- If you don’t use a separate account for business finances, you compromise the liability protection provided by an LLC
- Even if you’re a sole prop, a business checking account can benefit your business
- Use a business banking account to make bookkeeping simpler, track deductible expenses, and prepare your practice in case of an IRS audit
- Heard Banking is the only financial services platform designed specifically for therapists (and it integrates directly with Heard bookkeeping, accounting, and tax prep)
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Visit our Therapist Tax Center and Tax Deductions for Therapists Hub for everything you need to know about taxes as a practice owner. If you're just starting out, here's everything you need to know about How to Start a Private Practice as a Therapist.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
* Heard Banking is a financial technology company, not a bank. Banking services provided by i3 Bank, Member FDIC. Banking technology powered by Unit Finance, Inc. The Heard Visa Debit Card is issued by i3 Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit cards are accepted. Deposits may be eligible for up to $3 million of FDIC insurance through a network of participating banks. Each participating bank is FDIC insured up to $250,000 per depositor, per bank. Accounts are eligible for pass-through deposit insurance only to the extent pass-through insurance is permitted by the rules and regulations of the FDIC, and if the requirements for pass-through insurance are satisfied.
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