If you operate a business, you likely need a business bank account. Experts highly recommend opening one to draw a line between your business and personal finances.
But before you open a business bank account, make sure you understand how they work and what features would benefit your situation best.
[LINK: Best Business Checking Accounts]
Who Needs a Business Bank Account?
Generally, a business bank account is geared toward small businesses. In fact, depending on how your business is structured, you might be legally required to open a bank account dedicated solely to your business.
For instance, a limited liability company is required by law to use a business bank account that’s separate from the owner’s personal bank accounts. If you combine business and personal funds, you could lose the LLC’s legal safeguards.
On the other hand, if your business is a sole proprietorship, you’re not legally required to open a bank account just for the business. A sole proprietorship is an unincorporated business owned and operated by one person, with no differentiation between the business and the owner.
When Do You Need a Business Bank Account?
A small business should open a business bank account before it begins accepting or spending money, says Gabe Castillo, vice president of Beneficial State Bank.
A business checking account serves as the primary financial hub for most enterprises and is essential for frequent transactions like paying vendors, receiving payments and handling payroll, says Miles Paschini, CEO of FV Bank.
You can usually open a business bank account once you’ve obtained a federal Employer Identification Number from the IRS. You may also need a tax identification number from your state, depending on your business location.
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Why Should You Open a Business Bank Account?
Opening a business bank account makes sense for several reasons.
1. Separating Business From Personal Finances
Setting up a business bank account separate from your personal finances builds a “firewall” between your business funds and personal funds, says Castillo.
“Business clients often prefer to make payments directly to their vendors’ bank accounts rather than pay individual entrepreneurs, as paying directly to the vendors’ bank will leave a paper trail for audit purposes,” Castillo says.
2. Simplifying Tax Preparation
The IRS advises that business owners “keep separate business and personal accounts, as this makes it easier to keep records.”
A business bank account segregates business expenses from personal expenses, making tax preparation and accounting easier, says Rick Kuci, chief operating officer of business funding platform FundKite and former chairman and CEO of Grove Bank & Trust. For instance, it can help more easily identify whether a small business owner took a trip for business or personal purposes, and whether this travel qualifies for a tax write-off.
3. Staying Out of Trouble
Your bank likely prohibits personal accounts from being used for business purposes. A bank does this to ensure both it and you are following federal law, and it may close your account if you aren’t using the account correctly, which could disrupt your business.
Furthermore, your personal assets could become entangled in a business lawsuit if they’re mixed with your business assets.
4. Lending Credibility to Your Business
A business bank account boosts the legitimacy of a small business, Kuci says.
“Whether an entrepreneur is applying for funding or trade credit, everyone will want to see how they handle their finances,” Kuci says. “One of the easiest ways to gauge that is by reviewing activity in a business bank account.”
5. Taking Advantage of Banking Services
Castillo says a business bank account enables a small business to tap into a number of banking services, such as electronic payments, wire transfers, online bill payments and mobile check deposits. In addition, it might open the door to products such as business credit cards and business loans.
Do You Need a Business Savings Account Too?
Initially, a small company should simply open a business checking account, Kuci says. But as the business grows, you might want to open an interest-bearing savings account to hold money earmarked for things like taxes, future expansions and emergencies.
Although your business might not need both types of accounts, a savings account “is a useful adjunct to a checking account to build reserves and achieve longer-term financial goals,” Castillo says.
[LINK: Best Business Savings Accounts]
What Features Should You Look for in a Business Bank Account?
As you’re looking for a place to set up a business checking or savings account, here are some of the questions you should ask:
— Does the bank charge fees or require a minimum balance? If that’s an issue, you may want to look for a different bank with no or low fees and no minimum balance requirement.
— What is the interest rate? Be sure to check the interest rate for any savings account or checking account you plan to open. Earning the highest rate possible on your deposits can help fuel your business.
— Does the bank operate branches? In some cases, you might want to carry out your banking business at a branch, perhaps working with a “relationship banker” who can deliver tailored advice and recommend specialized services. If you do business with an online-only bank, you’ll be unable to visit a branch.
— How robust are the bank’s business products? At some point, you may want to apply for a business credit card or a business loan. If so, consider choosing a bank that offers these options.
— Does the bank offer the services you need? Make a checklist of the services that are important to you, such as payment processing, ATM access and online bill pay.
What Do You Need to Open a Business Bank Account?
Here’s what you generally need to open a business bank account, although requirements may vary depending on the business structure:
— Name and address of your business
— Month and year of establishment
— Names of account holders
— Federal EIN or Social Security number
— Personal identification, such as a driver’s license or passport
— Business identification, such as a business license, articles of organization or articles of incorporation
— Initial deposit (if the bank requires it)
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