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Setting up a separate business bank account dedicated solely to your business is one of the most important things to do when creating a new company. By doing this, you could avoid a lot of potential problems further down the road, and it will allow you to understand your business finances better. Unfortunately, many new companies overlook this step, which is a mistake that we will discuss in further detail below.

Setting up a business bank account is easy enough, and in this article, we will discuss everything you need to know about the process and why you should do it.

Why Do You Need a Business Bank Account?

When just starting out as a business, many people will neglect to open a separate business bank account. They may think to themselves, "Well, I'm just getting started and am not making much money yet," or "I'm just a small business; I don't really think it matters." Alternatively, the idea might not even cross their minds at all, as they are busy with other important aspects of running a business. But there are several reasons why you should have a business bank account if you are going to be engaged in commerce.

  • You May Be Legally Required

    If you are operating your business as a separate legal entity or a DBA (Doing Business As), it is required by law to have an account exclusively for your business transactions. Business structures that are considered separate legal entities include limited liability companies (LLCs), corporations (C and S Corps), and limited liability partnerships (LLPs).

    These types of business structures are considered "incorporated," and once businesses are incorporated, they are viewed as separate legal entities from their owners. This means they have their own legal liabilities, tax obligations, and revenue, which acts as a barrier and provides liability protection to the owners' personal assets. Therefore, separate legal entities like LLCs and corporations are legally required to have their own bank accounts separate from their owners' personal accounts.

    If you are operating your business as a sole proprietorship or general partnership, you are not legally required to have a separate business bank account, unless you are using a DBA name under these structures. A DBA is a fictitious name or trade name that differs from your business's legal name. Since sole proprietorships and general partnerships are not incorporated, they aren't seen as separate entities from their owners. Therefore they are not required by law to have a separate business bank account (except for when using a DBA). However, many legal experts and financial advisors recommend these business structures use a separate business bank account anyway.

  • Tax and Accounting Purposes

    Many non-incorporated businesses, such as those operating as sole proprietorships, use their own personal bank accounts for their businesses. This is a bad idea for a number of reasons. First, it can be very confusing to distinguish business transactions from personal transactions for tax and accounting purposes. This can cause a major headache while filing your taxes and make understanding your business, from a financial and profitability level, a nightmare. You'll have difficulty keeping track of what things cost you, which can hurt your efficiency as a business and ultimately negatively affect your profitability.

  • Reduces Liability Risks and Chances of Being Audited

    Operating as a sole proprietor does not offer you the liability protections that a separate legally recognized business entity, such as an LLC or corporation, does. This means a person who operates a business as a sole proprietor is personally responsible for any debts associated with their business. Even if a sole proprietor has set up a separate business bank account, this account would still be considered a personal account. This could jeopardize any financial assets in both their business and personal accounts if the sole proprietor has any outstanding debts or gets sued. Additionally, writing off business expenses paid for using your personal account could increase your chances of being audited by the IRS.

    Alternatively, suppose you are using a separate legal entity such as an LLC or corporation. If you are not using a separate business bank account, or if you are, but are mixing your personal and business finances, you could be legally viewed as not operating as a separate business entity. This could jeopardize your personal assets if you have any outstanding debts or a lawsuit is filed against you. This could also increase your chances of being audited.

    Maintaining your business finances and bank account as separate from your personal finances and accounts, paying yourself through your business account would mean you are correctly using your separate legal business entity. This would protect your personal accounts' funds and any other personal assets you own, like a home or car. By correctly using a legal business entity, such as an LLC or corporation, you could avoid your personal assets being threatened; only your business assets (including your business bank account) would be vulnerable. So, by properly using your business bank account with a legally recognized separate business entity, you would be in compliance with the law and have liability protection, which shields your personal assets.

What Are the Additional Benefits?

In addition to avoiding potential negative issues, opening a business bank account can also open up a list of positive benefits that can help your business. These include the following:

  • Lends Legitimacy to Your Business

    By having a business bank account, you will appear much more professional to third parties. Your business name will be on your checks, credit and debit cards, and other payment methods. This can make you look much more credible to clients, other businesses, banks, and investors.

  • Allows You to Accept Credit Card Payments

    Opening a separate business bank account allows you to accept credit card payments. This can come with additional fees, but it can be worth it in order to process these sorts of payments.

  • Wire Transfers

    Having a business checking account will allow you to do wire transfers. A wire transfer is a bank-to-bank transfer that you can use to conveniently deposit or withdraw large amounts of money to or from other bank accounts.

  • Build Business Credit and Gain the Ability to Receive Financing

    Starting a business bank account will also help you create a relationship with your bank or credit union as a business. This can help build your business credit, which can help you get approved for financing in the future, including business loans and business lines of credit, which can help grow your business.

What Types of Business Bank Accounts Are There?

There are different kinds of business bank accounts. Depending on your company's needs, you can choose one or have multiple types of accounts at the same time. A business could operate just fine with just a checking account, but certain companies may benefit from having various types of accounts.

  • Business Checking Account

    A business checking account is probably the most common and universal type of business bank account. You can use this type of account in many ways to withdraw or deposit money. You can use your business checking account for ATM cash withdrawals and deposits, debit card transactions, writing or depositing checks, wire transfers, etc. This account can be used to store money to cover your operating costs, and you can pay yourself and your employees from it as needed.

    When you start a business checking account, many banks and credit unions will also offer you the ability to use accounting software and other technology-based business tools. These can come in handy and save you time and effort while doing accounting and preparing your taxes. Some business checking accounts will place a limit on how many monthly transactions you can make before they start charging you a fee. All of these aspects may differ depending on the business checking account you choose, so make sure to compare different account options before you pick one. There are also online business checking accounts, but these could be problematic if your business deals with cash, as most of these online banks don't have physical locations where you can make cash deposits.

  • Business Savings Account

    If you plan on setting aside money from your business that you don't plan on using immediately, you could open a business savings account. Business savings accounts typically allow you to earn a higher interest rate on this money when compared to business checking accounts. However, the money will be less accessible to you. Business savings accounts usually also come with certain guidelines or restrictions regarding deposits. Exceeding these deposit guidelines will typically result in additional fees. Of course, all of these variables will depend on the particular business savings account you choose to set up.

  • Business Certificate of Deposit Account

    Opening a certificate of deposit (CD) account could be a good idea if you have some business funds you'd like to save and won't need to access quickly. CD accounts allow you the opportunity to earn more money through interest. But the tradeoff is you will agree to keep the money in the account for a specific amount of time, and if you take it out, you will be charged significant penalties. The amount of time you will need to keep the money in the account before you can reap the rewards from interest will vary depending on your specific agreement and bank or credit union. But this time frame can range from a few months to ten years.

    The interest rates on these accounts will also vary depending on the amount of the deposit required and the length of time it takes for the account to reach its maturity (where you can pull the funds out without being charged penalties). Typically, the higher the amount required for a deposit and the longer the length of the CD term will mean higher interest rates.

  • Business Money Market Account

    Business money market accounts (MMAs) are somewhat similar to business savings accounts. They are interest-bearing accounts and typically offer higher APYs than standard business savings accounts. Business MMAs also have other features that a business savings account may not, including ATM cards for withdrawing funds and the ability to write checks. Although they have these positive characteristics, when compared to a regular business savings account, MMAs may require higher minimum deposits to create the account, which can be prohibitive to some business owners.

  • Merchant Account

    Businesses may need to open a merchant account in order to accept and process debit and credit card payments. When a payment is made using a debit or credit card, funds will first pass through this account and then will be transferred automatically to a primary business bank account. This process could take a while to complete, up to one or two days. Merchant accounts have application and setup fees and monthly and per-transaction fees, which will vary depending on your bank or credit union. You also may need to sign a contract for a set period of time to set up one of these accounts. Early contract cancelation can be done but will result in early termination fees.

What Do You Need to Open a Business Bank Account?

Once you have looked at different banks and credit unions' business bank account options and have decided which type you'd like to start, you can take the next steps to open your account. You will need to gather all the necessary information, documents, and identification before you will be able to open your business bank account. Depending on what business structure you are operating under, your financial institution, your state, and the type of account you are opening, these may vary but typically can include the following items:

  • Personal Identification

    A government-issued photo ID, like a driver's license or passport, will be required in order to open a business bank account. Some financial institutions may ask that you provide two forms of ID. Your personal mailing address, contact information, and social security number will also need to be provided.

  • Employee Identification Number

    You will need to get an employer identification number (EIN), also referred to as a Tax ID number or FEIN, from the IRS in order to open a business bank account. Alternatively, sole proprietors and single-member LLCs may be allowed to use their social security numbers. If your business has multiple members or partners, the personal information of these parties may also be required.

  • Business Information

    This includes basic information about your business, including your business name and address and the type of business structure you are using. You will also need to describe what kind of business you operate and what industry you're in.

  • Business Organization and Formation Documents

    These documents will differ based on the type of business structure you are using but can include the following:

  • Additionally, you will need to make an initial deposit in your business bank account in order to open it. The amount of this deposit will vary depending on your chosen financial institution and the type of account you are opening.

Are You Starting a Business?

If you are starting your own business, InCorp can help. We can assist in forming your legally recognized business entity in addition to providing registered agent services. Business owners can also take advantage of our entity management system and iOS app to help manage their businesses, stay on top of important due dates, and have easy access to all of their vital business documents.

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