Black Friday sale: Up to $1400 off bookkeeping, 100% tax-deductible.
Do I need to open a business bank account?
If you’re wondering if you need a business bank account, you’re asking the right question.
Does your business make money, take in payments or have expenses? A business bank account allows you to keep these funds and transactions separated from your personal transactions, reducing the headaches when looking at your statements. Plus, there are some perks to opening a new bank account just for business transactions that go beyond simplifying your credit card and bank statements.
Purchase protection
Your customers’ information is secured through the bank’s purchase protection.
Line of credit
You may be offered a line of credit through your business bank account that will make it possible to let your personal credit card take a much-needed breather.
Business credit cards
Your business bank account may lead to a business credit card complete with points, rewards, and routine credit increases.
Clean banking records
Come tax time, you’ll quickly know exactly how much you spent and earned over the year. This information is also helpful when preparing your monthly financial statements as well, or any time, really.
Protection from liability
If you have an LLC or you’re figuring out how to incorporate your business, you’re legally required to have a business bank account to separate personal and business spending. But it’s also just good business practice. Keeping finances separated offers all business owners more protection, including sole proprietors.
Credibility
A professional business uses professional checks. And a professional business owner has customers write checks out to the business–not themself.
What are the different types of business bank accounts?
Before opening a business bank account, you should determine what sort of account you’re looking to open. There are several types of business bank accounts that serve different functions.
Business checking account
Like a personal checking account, a business checking account allows you to write checks, make deposits, withdraw cash as needed, and may come with a business debit card. Business checking accounts are covered by FDIC insurance as well.
Business savings account
If you are looking to build a reserve of cash, a business savings account is a nice place to collect money for future projects or protect your operating expenses. Business savings accounts often have fees and, despite the federal reserve removing the limit, many banks still limit business savings accounts to only six withdrawals per month.
Business certificate of deposit account
You might choose a business certificate of deposit, or COD account, to save money at a slightly higher interest rate. The return might be slightly larger with a COD than a typical savings account, but you may be more limited in how you use the money. Money you put into a business COD account is locked in, along with the interest rate, for the term of the COD. If you withdraw funds early, you could pay a steep fee.
Merchant account
If your business accepts debit or credit card payments, you will likely need a merchant account. A merchant account is an intermediary account that accepts and processes the payments before sending money on to your business checking or savings account. There are associated costs with these accounts and they often come with a contract for multiple years.
What do I need to open a business bank account?
Once you’ve decided on the type of account you need and found the best banks for small business, it’s time to take action. The next step is figuring out what documents do I need to open a business bank account?
Here’s what you’ll want to bring to the bank:
- Your personal social security number.
- Two pieces of personal identification such as a driver’s license, state ID card or passport.
- Your Employer Identification Number (EIN). You can apply for your EIN online. You may not need one if you are a sole proprietor. However, registering with your EIN can prevent identity fraud.
- Your business’s name, or a “doing business as” (DBA) certificate. You can get a DBA certificate through a local, county, or state agency.
- Specific paperwork for your business depending on business type as illustrated in the chart below.
What should I consider when opening a business banking account?
You have options and opportunities when you start shopping around for a new business bank account. The bank that works well for you as an individual might be a good fit for your business—or it might not. This is where a bit of due diligence can pay off handsomely.
Banking fees
You can deduct banking fees when filing your business taxes, but that doesn’t make them any more fun to pay. Read the list of fees carefully and consider how many fees you’re comfortable with. Some banks advertise zero account fees. Be sure to check how much the bank charges for other things like cash deposits, using debit cards, withdrawals, transfers and account maintenance.
Minimum balances
Many banks have minimum balance requirements, especially brick-and-mortar banks. This may or may not be a concern based on how you plan to save and use your funds. If you operate on a cash-in and cash-out basis, your minimum balance may fall below the threshold, creating additional fees for your business. If your account balance fluctuates frequently, it may be worthwhile to shop for a business bank account with no minimum balance requirement.
Working relationships
If you anticipate applying for business loans or lines of credit in the future, it’s helpful to open a business checking account with a bank where you can continue doing business. Some accounts might include preapproval for lines of credit when you set up the account. At the very least, building a relationship with a bank with additional funding options can simplify the process when you’re figuring out how to get a business loan.
Interest rates and savings options
If you plan to build a bit of a nest egg in your business savings account, interest rates matter. It’s good practice to check out the interest rates from different banks and choose one to help you make the most of your savings.
ATM options
If you are going to need cash, you might want an ATM close by, not three towns away. And nothing beats the convenience of an after-hours ATM when you need one. Different banks have different ATM networks. Some online banks even have partnerships that give their customers free access to another bank’s ATMs. Check to see if your selected bank has its own ATM or ATM partners nearby.
Frequently asked questions about business bank accounts
Information about business banking stretches beyond the basics of what you need to open a business bank account. Looking for a bit more information? Read on for a few frequently asked questions.
Can I open a business bank account without an LLC?
Yes. Business bank accounts are available for all types of businesses. That means you can open a bank account as a sole proprietor, a partnership, an S corp, or a C corp.
What do I need to open a business banking account?
That depends on the type of business you have. Banks require different documents from different types of business, but they do not require every business owner to form an LLC before opening a new account.
How much do you need to open a business bank account?
The answer depends heavily on the bank and its requirements. Some banks require hefty deposits to open a business bank account. Others require as little as $25 or even less.
Check the bank’s other requirements before you open an account, however. A bank that has little to no minimum requirement to open a new account may require you to keep a hefty daily balance of $1,500 or more. If you fail to keep the balance, you may end up paying fees.
Read all the fine print on minimum opening requirements, minimum daily balances, and any associated fees before deciding if a bank is right for your business.
Do I need an EIN to open a business bank account?
It depends. There are two times when you may not need an EIN to open a business bank account:
- If you are a sole proprietor
- If you are an individual LLC
In both of those cases you are taxed as an individual, so you don’t need a separate business identity as far as the government—or some banks—are concerned. Sole proprietors and individual LLCs are able to open a business bank account using only your social security number, but you may not want to.
Applying for an EIN is quick and easy. It’s a free process. With an EIN from the federal government, you have a bit more protection if your one-person business works as a contractor or needs to fill out any tax forms. Using your EIN rather than your social security number avoids giving personal information in more online financial databases than may be necessary.
If you are not a sole proprietor or an individual LLC, you definitely need an EIN to open a business bank account. According to the U.S. Small Business Association, you also need an EIN to:
- Pay employees
- Operate as a partnership or corporation
- File tax returns
- Withhold some taxes
- Use certain retirement plans
Our advice? Go ahead and get an EIN.
Do I need a business bank account for a sole proprietorship?
Legally, no. Realistically, yes. If you are a sole proprietor, as far as the IRS and the federal government is concerned, you don’t have to separate business and personal money in the bank. But you are obligated to report business income and accurately file your taxes, which means you need to track your business income and expenses very carefully.
It is far easier and less time consuming to monitor your business spending and calculate profits when you separate business transactions from your day-to-day bills. You won’t get in trouble with the government if you don’t have separate bank accounts. But you risk hearing from the IRS if you mixed your personal and business money in a single account and can’t calculate the information you need at the end of the year to file taxes.
Can I use my personal bank account for my small business?
It depends on what type of small business you have. If you have an LLC or a corporation, you are legally obligated to separate your personal and business finances. That means you can’t use a personal bank account for your small business.
If, on the other hand, you have a sole proprietorship, the IRS does not require you to use a business bank account for business money. In that case, you may use your personal bank account for your small business. Just be sure to track your business income and spending for year-end tax obligations!
Work and life are commingled for small business owners. It’s just how it works when you’re getting a business idea off the ground. While you may be living and breathing your business ideas, save yourself future headaches by separating your finances. Take time to open a business bank account. It will keep managing your money simple and easy, so that you have more time to go back to what matters most: making more of it.
