From the day you get your first credit card (or maybe when you get your first bill), you start realizing how important it is to keep track of your finances. This importance is magnified when you start your own business. That’s when it becomes essential to know how to open a business bank account.
While opening a separate business bank account is an added responsibility, it also offers a lot of benefits. And if you’re dealing with partners, investors, or incorporation, it will likely be a requirement.
This post helps make the process easier, at least at the start, by taking you through all the benefits, options, and steps to opening a business bank account.
The Benefits of Having a Business Bank Account
There are a number of benefits to opening a business account, ranging from practicality to peace of mind. Here’s a look at a few of them.
Accepting Credit Card Payments
A business account allows a business owner to perform types of transactions that a personal account doesn’t — the most important of which is the ability to accept credit cards. Requiring customers to pay in cash — and being unable to accept those who don’t — is a big limitation on a business.
Those with a business bank account, however, can set up a merchant account, which allows a business to accept credit card payments. Although there is a fee that comes with processing credit card payments (usually a maintenance fee, plus 2-3% of the charge), with the majority of customers preferring to pay with card over cash, it’s generally be worth it.
Business and merchant accounts often come with many complementary services, including remote deposit captures, automated clearing house capabilities, online banking options, and other features aimed at making business transactions much easier.
Multiple Account Owners
A business bank account can also have a number of authorized account signers. This is useful for an owner who has partners or wants to appoint a trusted employee to do their bank errands. Make sure, however, that you completely trust the person you share your account with. Not only do bank accounts hold your money, they’re also associated with your social security number (for sole proprietors), employer identification numbers (for partnerships or corporations), and other personal details.
More Organized Bookkeeping
Business accounts are also a way to separate business finances from personal finances. While you may not mind mixing the two for the first few transactions, imagine a year’s worth of transactions. Then, imagine having to pick through these transactions come tax season. Not pretty.
Separating accounts makes things much easier and clearer. For instance, if last month’s income of $15,000 and a business expense of $5,000 all go into a dedicated business account, then it’s easy to see the business’s cash flow and net profit of $10,000. This won’t be nearly as easy to see if these transactions are mixed with last month’s personal restaurant and movie bills.
Keep Things Professional
Any business, whether sole proprietorship or corporation, should be professional. Writing business checks, furnishing official receipts, and issuing company payroll are small but significant ways of enforcing this. An active business account also helps you build a relationship with your bank — something that may be beneficial should you ever decide to apply for a line of credit or small business loan.
Furthermore, just as an incorporated business entity protects all personal assets, a business account protects your personal funds. Should you ever be involved with any legal dealings, knowing that your personal finances are in a separate bank account that is kept private and safe is a great assurance to have. (Note: Financial protection is usually given to owners of corporations. A sole proprietor, on the other hand, is not considered legally separate from their business unless they create a sole proprietor LLC.)
Where to Open a Business Bank Account
Most business owners opt to open a business account in the same bank as their existing personal account. This makes sense, as they are familiar with the bank, and can conveniently do all their errands in one go.
However, some financial institutions may offer better rates, fees, and services specifically tailored for business needs. So if you have the time to look around, it may be worth your while. These are the details to consider:
- Sign-up offers
- Monthly service fees
- Transaction fees for transfers, ATM withdrawals, credit card charges, or other services
- Interest rates for savings and checking accounts
- Interest rates for credit lines
- Minimum balance requirements (and fees if these aren’t met)
- Opening duration requirements (and fees if these aren’t met)
- All other requirements, fees, or discounts
A few recommended banks for small business owners are Chase, which offers the possibility of no monthly fees and a low maintaining balance, Bank of America, which offers generous sign-up bonuses, Azlo, which charges no maintenance fees whatsoever, or TIAA Bank, which offers online-only banking that returns a high interest rate on clients’ savings.
The ideal bank will depend on the business, and of course, you as the business owner. Maybe you don’t expect a lot of transactions and don’t mind a higher transaction fee for a higher interest rate. Perhaps your priority is a business account with no annual fee. Or your current bank may offer a special discount for maintaining both your personal and business accounts with them. These are all factors to consider when selecting the bank for your business account.
Business Checking or Business Savings?
Once you’ve settled on a bank, you have the option of opening a business checking or a business savings account. Similar to personal accounts, a business checking enables you to issue checks, transact money electronically, and withdraw funds through a debit card. This covers most of the day-to-day dealings a business is likely to have and is, therefore, the first account a business should open.
Savings accounts, on the other hand, are a good place to keep your business funds while earning interest at the same time. The ideal business savings accounts are high-yield savings accounts, some offering as high as 2.55% interest, or a money market account, with higher interest rates but limited transactions.
When used in combination, a business checking account will allow you to easily accept and use the cash you earn in the short term, while a savings account can earn interest on the amount you decide to deposit in the long term.
How to Open a Business Bank Account
Opening a business bank account requires more than a standard personal account but is still fairly easy to do. The main difference is that you will need to provide verification for the name and nature of your business, as well as its registration with the IRS.
The specific documentation depends on the type of business structure. Sole proprietorships are the simplest, usually requiring a social security number, two forms of personal identification (i.e. a passport and driver’s license), and any business name documentation, usually a DBA or “doing business as” certificate.
Partnerships and corporations (including limited liability companies and S-corporations) will need their federal employer identification number, partnership agreements, articles of organization, or articles of incorporation, and all registered business licenses, depending on the nature of the business. For example, a restaurant, health product, or liquor brand might need to procure additional licenses.
Most banks allow business accounts to be opened online or in person. If you have all your requirements, an online application can take you less than 15 minutes, while applying in person may take 30-40 minutes. The decision is really a personal preference — do you like the convenience of an online process, or would you rather have someone walk you through the steps and answer all your questions? Both options are available to all business owners.
Once everything has been submitted, it may take a day or two to verify your account and issue an account number, and about another week to receive your business credit card or debit card in the mail. But when all that’s done, you can congratulate yourself — your new business bank account is officially good to go! Start testing out all the business banking features by depositing funds into the account, through check or electronic transfer, monitoring the transactions online, and writing out your first checks.
Getting Down to Business
With a fairly easy application process and requirements that you already have on hand, a business bank account is well worth setting up. Even if you’re a small business owner just starting out, having a dedicated account and official financial statements can help save you time and effort, and can guide you as you continue to grow your business.
