In everyday life, most people own a bank account to digitally use their money and protect it from theft. When it comes to opening and operating a business, the method of keeping money safe is no different. Business bank accounts are used for business transactions only. They are used for accepting payments from clients, as well as paying employees and vendors.
When looking to incorporate (form a corporation) the IRS requires a business to have a business bank account specifically. You can do this as soon as you have obtained your EIN, which is like a social security number for businesses. Common business accounts include checking accounts, savings, credit card accounts, or merchant services accounts.
What Is a Business Bank Account?
A business bank account, separate from that of your personal bank account, is used solely for the transactions of your business, such as accepting payments and paying employees or vendors.
If you’re thinking about starting a business, it’s a good idea to look at opening up a business bank account to protect both your personal and business assets. In fact, if the business that you’re forming is going to be incorporated, the IRS will require that your business have its own bank account.
So, what’s the difference between a personal bank account and a business bank account?
Separating your personal and business finances may not seem like a very important detail at first thought, but it’s actually the recommended practice for business owners in most scenarios. Some of the most common business bank account options consist of:
- Checking Accounts
- Savings Accounts
- Credit Card Accounts
- Merchant Services Accounts
Having two bank accounts, one for personal use and one for business, will not only offer you improved asset protection but also make it much easier to handle business finances: track expenses, make payments, file taxes, and more. Additionally, a business bank account often allows you access to certain advantages, such as small business tax credits and deductions.
Benefits of a Business Bank Account
As a business, you will hopefully accept and spend money to generate revenue. As soon as this occurs, you will need to open a business bank account. There are various benefits of opening a business bank account, sometimes even added perks.
- Protection: By participating in business banking, you will be offered limited liability protection. This will keep your funds completely separate from that of your personal funds. This is essential because when you go to do your taxes or look for funding, you need to have your finances organized. It also keeps your personal information secure.
- Professionalism: By allowing customers to pay with credit cards, you will appear professional. You will also be able to allow your employees to deal with banking. None of this can be done without a business bank account.
- Organization: When it comes to business banking, you will typically be offered a line of credit. This is an option for funding for growth, or quick cash if you find yourself in a business emergency.
- Purchasing power: Business credit card accounts allow you to obtain funding for large purchases that might jumpstart your business, or to begin generating business credit.
There are a number of benefits associated with opening a separate bank account for your business when compared to simply using your personal account for business finances. Here are some of the key benefits that a business bank account can provide you.
Asset Protection: Keeping your business funds and personal funds separate is essential when it comes to asset protection. If your business is an LLC, a business bank account will offer you this separation and limited liability protection.
Purchasing Power: If you’re in the early stages of your business, a business bank account can help you with larger startup costs. These accounts typically come with options for establishing a line of credit and offer you some peace of mind should emergency costs arise.
Organized Handling of Expenses: Having a dedicated bank account for your business will make handling expenses and other financial transactions considerably more organized and simple. This will also prove very helpful come tax time when filing for your business and taking advantage of any business deductions.
Professional Image: A business bank account will allow customers and clients to make out payments to your business and give you the option of accepting credit card payments. When compared to a personal account, a business account offers a much more professional image.
When to Open a Business Account
As soon as you begin operation you should open a business bank account. This can be done upon receipt of your employee identification number (EIN) from the Internal Revenue Service. If you begin to accept money for transactions related to business, or even spend money, you should open a bank account to keep the funds separate.
Whether you’re in the early stages of starting your business or yet to embark, you may be wondering at what point you should open a bank account for your business. Generally speaking, the answer is that once your business is ready to start spending or accepting money it’s ready for a bank account.
When you’re ready to open a bank account for your business, note that you’ll first need to acquire a federal EIN (Employer Identification Number). This is a unique 9-digit number that the IRS uses to identify businesses for tax reporting purposes.
As noted earlier, the IRS requires all incorporated businesses to acquire an EIN and have its own bank account. If your business is unincorporated and not required to open a bank account, you may find that it’s best to have one in place anyway. For example, a bank account is a prerequisite if you wish to obtain a loan for your business or if you have a retail business that needs to accept credit card payments.
How to Open a Business Bank Account
Opening a business bank account can be done at any bank or credit union. It is quite easy, you can go into your current bank or go online. You should be aware of what the bank will ask you for when you are opening your account.
- Photo ID: To prove you are who you say you are.
- Employer Identification Number (EIN): This is either a specific tax number from the IRS or a Social Security number if you are operating as a sole proprietor.
- Your business's formation documents: For an LLC this might be the operating agreement and articles of organization. It may also be articles of incorporation for a corporation.
- Ownership agreements: If you have purchased anything related to the business or have business contracts to prove its validity.
- Business license: In most instances, you will require a business license to operate. This will be requested to open the account.
The process for opening a business bank account is relatively simple and straightforward. Typically, most of the effort spent opening a business bank account will go into researching which bank and account type is right for you.
To get started with this process, you’ll need to visit the bank’s website or one of their local branches. The bank will ask for the following documents and information from you:
- Employer Identification Number (EIN). If a sole-proprietorship, they will ask for a Social Security Number.
- Your business formation documents. If a sole-proprietorship, this will include any DBA registrations.
- Your business address and contact information.
- Your business license.
- Your business ownership agreements.
- Driver’s license number and proof of identity.
Banks often charge maintenance fees when it comes to a business checking account. Typically if you have a specific amount of money in the account this will be waived, but it is a good idea to be aware of it. Transaction fees may also be involved. Whether that is when transferring money out, ATM fees, or early termination fees for closing your account. Savings accounts sometimes have requirements as well. You may need to keep a certain amount of a threshold in the account or pay a monthly fee regardless.
What to look for in a Business Bank Account
When opening a business bank account you should always look for low fees. Rather than waste your hard-earned business dollars on added fees to the bank, you should look for an account that offers all the services you want, with minimal monthly dues. Be sure to avoid early termination fees associated with bank accounts as well.
You might also want to look for fund protection. This is when your account will provide some return on the amount in your account. This is essentially interest and can help you to keep your money in savings accounts, and to grow that money without doing anything.
Sometimes you can find special offers when opening a business bank account. This might include cash sign-up specials, special offers, or deals based on how much you deposit into the account, and how long you keep it there. You may also want to look for good interest rates in lines of credit as well as savings and checking.
Even though the task may seem a bit daunting at first, taking the time to find the right bank account for your business can provide both immediate and long-term benefits. While some may think that the easiest option is simply to open a business account at the bank where they have a personal account, this may end up costing you in terms of rates, services, fees, and more.
When looking for the best business bank account options, you’ll want to prioritize two factors: low fees and fund protection. It’s common practice for banks to charge maintenance fees for checking and savings accounts. These fees may be waived in certain circumstances if you meet minimum monthly balance requirements or other requirements stipulated by the bank. Some banks will offer low threshold requirements specifically targeted to small businesses.
Be sure to keep an eye out for other fees, as well. Some accounts will charge transaction or deposit fees when you exceed a set number each month. They may also charge a flat fee when you withdraw funds from ATMs of different banks. Think about what your business needs to successfully operate on a consistent basis, so that you don’t get stuck with unfortunate fees.
Additionally, you’ll want to be certain that the bank you open a business account with has FDIC-insured fund protection. The Federal Deposit Insurance Corporation (FDIC) offers financial institutions insurance to protect your money in the event that the bank should fail. While an unlikely scenario, having this protection in place is a smart idea.
What Business Account is Right for You?
What is important to note is that every business should have both a savings and a checking account. This is true for that of an LLC, corporation, and even sole proprietor. This is because a savings account will provide you access to emergency funds, but it will help you to protect your assets. This is essential because the government only insures money in an account up to $250,000. This means that you can have two different accounts (one being a savings, and one a checking) each with up to $250,000 safely.
You might also want to separate funds for different reasons. Whether you want to have an account to earn interest, to provide a place to put savings, or to pay off bills each month in a checking account. It is important for businesses to categorize money and ensure that it is protected. This can be done by having both types of bank accounts.
As you look at different bank account options consider the operations, needs, and goals of your business. You don’t want to settle on a bank that limits your capabilities and growth potential.
For example, if you know that your business will require a high volume of checking transactions, prioritize banking options with a high limit. Or if you know that you’ll need to visit a physical branch from time to time, be sure that you prioritize local branches over online banking options.
Also, you’ll not only want to think just about what your business currently needs but where it might be heading in the future. For example, it can often be easier to establish a line of credit or loan for your business from a bank where you’ve already established a business bank account. Or if your business is planning to accept credit card payments from customers, you’ll need a merchant services account in place to handle the transactions. Banks that offer these services are typically more efficient and easier to work with than third-party processors.
With all of your business-specific factors considered and covered, a bank’s introductory offer or sign up special could be a factor that tips the scales in your decision. You’ll discover that many banks use promotions as a way of attracting business owners to choose their institution. This might include cash bonuses for an initial deposit or lower fees for businesses that open new accounts.