A must have for any new small business is a business bank account. You might feel as if you could save yourself a little money and time by continuing to operate out of your personal bank account, but having a business bank account will pay for itself in multiple ways as you begin to grow your business.
With all the complexities that go into operating a business, having that separation between your personal finances and business finances will provide greater clarity about your business operations and protect your personal assets.
A business bank account also allows you to establish a business relationship with your bank, beyond what you might have with your personal banker, to open financing avenues as your business grows and prospers.
In this blog, numerous reasons as to why you will benefit from opening a business bank account will be outlined. We’ll also provide guidance for how to open a business bank account with the proper information and documentation, and provide reassurance of how simple it can be to open your account.
Why You Should Open A Business Bank Account
Mingling your business and personal banking might not seem like such a big deal, and when you first start, you might be right. You’ll likely be using your personal assets to prop up your business as it gets off the ground, and it might seem like a hassle as you transfer money back and forth between your personal and business accounts.
But mixing your funds could create greater headaches than the advantages you think you are gaining. The lack of separation also can cloud your vision of how well your business is operating right out of the gate.
Advantages you gain once you understand how to open a business bank account include:
Legal Liability Protections
You have a better opportunity to protect your personal assets from any business legal liability when you separate those finances in your bank accounts. Anyone who sues your business will have less access to your personal assets when they are maintained separately from the beginning.
You can offer a further layer of protection when you set up your business as a Limited Liability Company or a Corporation. But if you do face a judgment against your company, the judge would be less likely to grant access to your personal finances if you can prove they have been legally separated from the outset. Some state laws also are designed to protect personal assets in the face of a business failure.
Tax compliance is challenging enough without mixing personal and business finances. The good news: most of your business expenses create tax deductions. But when your personal and business finances are entangled, deductible vs. non-deductible expenses get muddied, and the IRS isn’t a fan of this. Muddied finances raise red flags that can lead to an audit, which is not something your company wants to face in its first few years.
If you are doing business across state lines or international borders, tax compliance will get even more complicated. Keeping business funds separated will be even more important in such a case.
Be Able to Accept Credit Cards
When you use an outside company to process credit cards, they will directly deposit the money into your bank account. Most will not accept a personal bank account for such transactions, because they also have financial-services laws they must follow. If you want to accept credit card payments in your business, you must have a business bank account.
Credit-card processors are required to audit their customers’ accounts occasionally to ensure only legitimate business transactions are taking place. These laws are designed to prevent money laundering through credit-card processing.
With a business checking account, you will be able to have checks with your company name, logo, address, and telephone number imprinted. Companies you do business with, such as wholesalers or suppliers, will be more willing to take a company check than they would a personal check. This saves you time and possibly money if you would need to pay with a money order or cashier’s check instead.
Company checks also would be more favorable when working with landlords, utilities, etc.
Lines of Credit
Developing a business relationship with a financial institution also opens the possibility of getting a line of credit for your business.
Lines of credit basically are open-ended loans where you have access to a predetermined pool of money. You take out the amount of money when you need it and pay interest only on the portion of the line of credit you access.
A line of credit is particularly helpful to a seasonal business where you need to buy inventory for a certain time of year then pay back the loan as you sell the inventory. Another example would be a construction company where you need supplies during the building period then repay the loan as you receive payments from your client.
The size of the line of credit will depend upon your business and its needs. A retailer might only need a few thousand dollars to stock up on inventory, whereas the construction might require hundreds of thousands of dollars.
Interest rates on lines of credit typically are lower than on other short-term loans that could be used to cover the same types of expenses, which makes that relationship with your financial institution so important.
Can You Use a Personal Bank Account for Business?
You certainly can choose to use a personal bank account for business if you are concerned you don’t know how to open a business bank account. Small, home-based businesses and particularly sole proprietors often use their personal bank accounts for business without challenges.
We’ve gone over a few of the benefits of using a business bank account, and touched the common disadvantages of using a personal bank account. Let’s refresh for just a minute on those:
- Difficult to track business expenses: Come tax time, you’ll want to deduct your business expenses from your income, so tracking those expenses is important. You also will get a better idea of the health of your business and how you can operate better when you can easily understand your income and expenses.
- Risk to personal finances: Getting into business comes with certain legal risks that can hurt you financially. Your personal finances can be better protected from business liability if they are separated.
- Privacy: If your business involves partners or employees, you can better shield your private finances if you operate through a business bank account. If you need to hire a bookkeeper for help with payroll, you don’t necessarily want that person to have access to your personal finances and spending habits.
What Do I Need to Open a Business Bank Account?
You shouldn’t feel intimidated about how to set up a business bank account. It will be a little more involved than opening a personal bank account but is pretty straightforward once you understand what documents are required to open a business bank account. This documentation ensures the legitimacy of your business.
What documents are required to open a business bank account will vary from bank to bank, city to city, and state to state, but some general rules will apply. A smaller bank in your hometown may not require as much paperwork as a national bank might. But a bigger bank might offer more services your business could use, such as lines of credit or better relationships with the Small Business Administration (SBA). The SBA is a great source for loan guarantees for small businesses.
As you learn how to open a business bank account, check with your personal bank or a national bank to answer the question: What do I need to open a business bank account? We’ll explore the basic document requirements for opening a business bank account below:
EIN (Employer Identification Number) or Social Security Number
You can start a small business as a sole proprietor with your Social Security Number (SSN), but business experts highly recommend obtaining an Employer Identification Number (EIN) from the IRS for any business venture. If you form your business under any other structure, such as a general partnership, limited liability company (LLC), or corporation, you will be required to have an EIN. If you plan to hire employees, you also will need an EIN.
Most banks also expect proof of your EIN among the documents that are required to open a business bank account, though smaller, local banks might not.
An EIN also can be used for other purposes, such as providing proof of your business to wholesale suppliers, where you can purchase less expensive supplies. Commercial landlords also might require an EIN if you need to rent office or warehouse space.
You will need to provide personal identification for all parties who will be listed as owners on the account. These will need to be official government-issued IDs, such as a driver’s license or passport. You also will need to provide Social Security numbers.
If you have foreign-born owners, you might need to provide residency papers, Individual Tax Identification Numbers (ITINs), and/or work permits. Again, this might depend upon a bank’s regulations or state laws.
Business Formation Documents
Business formation documents will vary from state to state. Some states may not require a sole proprietor to register a business at all. Other states require all businesses to register, even home-based businesses that might be as simple as working as a graphic designer and never having clients in your home.
Most states will have a registration requirement for other types of business structures, partnerships, LLC, and corporations. Registration varies by state with some taking place through the Secretary of State and others through the Commerce Department.
Some local governments also require business registration. For example, if you live in a larger city in Arizona, you will likely need to register your business with the state, county, and city.
Copies of your business registration paperwork will be among the more important documents required to open a business bank account.
Ownership Agreements (for Joint Accounts)
If you plan to operate your business with more than one owner, whether as a partnership, LLC, or corporation, most banks will require you to include an ownership agreement among the documents that are required to open a business bank account. An ownership agreement would be considered the best practice for any business that has multiple owners, even if you are relatives or best of friends. An ownership agreement likely will be required for state or local registration, as well.
An ownership agreement can be as simple or complex as you like. Among the features it should include are:
- Percentage of ownership: Generally these would be equal between partners, but can vary depending upon the stake each owner has and their future time commitment. Also, there can be advantages for businesses with majority ownership held by minorities or females. So if you want to designate a 51 percent stake to a minority or female owner, that could open doors to certain contracts or financing options.
- Duties of owners: Define the roles of each owner.
- The locale for documents: You should designate a place where financial and legal documents will be kept and where legal paperwork, such as subpoenas or summonses, will be served.
- Escape clause: Define how the business can end or how one partner can leave. For example, remaining partners would retain a right of first refusal, so a partner could not sell their share to an outside party without the permission of the partners or the partners would have the first option to buy out the partner.
Templates for ownership agreements can be found online, or you could have one drawn up by an attorney or experienced business consultant.
Initial Deposit to Open a Business Bank Account
Most banks will require an initial deposit when you first open up your business banking account. You’ll want to consider how much to include in your initial deposit as you decide how to open a business bank account. The bank’s requirements will vary by bank and by the type of business you are opening. Some banks might let you open an account for a small business with as little as $25 or $100. For something like a construction business or a high-volume business like a restaurant, they might require a higher initial deposit, more like $1,000 or $5,000.
A more important question as you decide how to set up a business bank account might be: What is the minimum daily average balance needed to avoid higher fees? For example, a bank might offer free business checking as long as you maintain a minimum daily average balance of $1,000 or charge you $50 a month if your daily average dips below the minimum. In such a case, you might want to make a bigger initial deposit to avoid the monthly fees, especially if it’s going to take a while to generate a steady stream of income.
How Long Will It Take to Open a Business Bank Account?
Opening a business bank account generally can be done in less than an hour once you’ve fully answered that question: What do I need to open a business bank account? The bank will need to enter your information into its computer system and possibly scan your documents. They will also need to make your initial deposit. If you are at the bank in person, they will give you some temporary checks printed with your company name and debit cards. If you plan to open a business bank account online, you need to be prepared to transfer funds for the initial deposit.
How you make your initial deposit might affect how quickly you can access your money. Some banks will hold access to money from a personal check for up to seven days. A cash deposit or cashier’s check will give you more rapid access to your money. If you set up the account with your personal bank, you also can transfer the money between accounts for faster access.
Can I Open a Business Bank Account Online?
Most banks are set up now so you can open a business bank account online. You will need to be able to scan or photograph the necessary documents to attach to your application to set up a business bank account.
You also have options now for online-only banks that charge lower fees than brick-and-mortar banks because they do not have the expenses of maintaining and staffing physical locations. However, many larger national banks are offering those same services and reduced costs to customers who are willing to do all of their banking online.
Online banking also offers many other features that are beneficial to a small business once you have figured out how to open a business bank account:
- Automatic bill payment: You can schedule your regular bills, such as rent and utilities, to be paid automatically, so you don’t need to remember when they are due and can keep your payments on time.
- Accounting software integration: You can integrate your business bank account with your online accounting software. This eliminates the task of re-entering your sales and spending into your accounting software. You save time and avoid mistakes that can creep in during data entry.
- Payroll simplification: Whether you use a payroll service through your accounting software provider, another payroll service, or your own staff, you can ease the process by making direct deposits into your employees’ bank accounts.
- Credit card services: Online banking opens the possibility to access more credit card servicing companies that offer lower rates when payments are handled completely through online transactions, eliminating the need for hardware.