How to Open a Business Bank Account
- Why open a business bank account?
- How does a business bank account help me manage cash flow?
- How does a small business bank account help with record-keeping?
- How can a business bank account protect me from personal liability?
- What are other important reasons for separating personal and business finances?
- How does a business owner maintain separate financial accounts but pay for personal expenses
- What are some features and advantages that business accounts may offer?
- What’s the best type of bank account for my small business
- What do I need to open a business bank account
- What documents will I need for my business?
- Do I need different documents to open an account for a C-corporation vs. an S-corporation
Why open a business bank account?
It’s easy to put off the task of opening a business bank account. But if you operate a business, keeping your personal and business finances separate is best practice. Opening a new business bank account isn’t complicated and comes with lots of benefits, such as:
- Managing cash flow
- Making bookkeeping simple and easy
- Simplifying taxes
- Protecting you from certain liabilities
- Enhancing your professional image
A dedicated business bank account can be a valuable tool for your business.
How does a business bank account help me manage cash flow?
Cash flow is the amount of cash that’s moving into and out of your business, and it’s a window into your business’s health. It gives you, at a glance, the knowledge you need to make informed business decisions.
Often, your expenses and revenues are not in real-time (for example, it might take a few days for a client to pay the invoice you sent them, or your vendor may give you a couple weeks to pay a bill). A business bank account gives you the ability to see where the business stands in terms of actual income(versus accounts receivables) and actual expenses (vs accounts payables) at any given moment in time.
If you don’t have a separate business bank account, it’s almost impossible to determine cash flow because your business transactions will be mixed in with personal ones.
How does a small business bank account help with record-keeping?
A separate business bank account makes it much easier to keep financial records, which in turn can help you obtain insurance, legal certifications, and any licenses that are required to operate in your industry.
For instance, say that your business is required to have a contractor’s license. In order to obtain a contractor’s license, state contractors boards may require financial statements showing the financial health of the business. If your business does not have a separate business account, it may be challenging to supply the proper documents and records.
Clear, well-maintained financial records will also help you manage your books and file your taxes.
How can a business bank account protect me from personal liability?
If your business is formed as an LLC, corporation, or limited liability partnership, it’s considered a separate entity in the eyes of the law. This separation can help to protect business owners from being personally liable for business debts.
To maintain this separation and protect yourself from personal liability, you need to treat your business as a separate legal entity. If you’ve commingled your personal and business assets, and someone sues your business for debts, you’ve exposed yourself to the possibility that a court may “pierce” the corporate veil and allow your adversary to collect a judgment against you personally. A business bank account can help you stay protected from personal liability by maintaining the separation between yourself and your business.
What are other important reasons for separating personal and business finances?
In addition to helping maintain organized financial records and meeting the requirements for licenses and insurances, a business bank account allows business owners to take advantage of certain tax benefits. For example, if you want to write off business expenses and receive business-related tax deductions, then you need to prove that you are in fact operating a business.
Plus, if the IRS ever decided to audit your tax return, it would be crucial to demonstrate business-related transactions that could help your case. The IRS recommends keeping business transactions separate from personal ones. Having a clear and consistent record of your business finances will help you defend yourself in an audit, in addition to making tax payments less of a headache.
How does a business owner maintain separate financial accounts but pay for personal expenses?
At some point, business owners need to use a portion of their business profits to pay for personal expenses, like living expenses, to pay a debt, and to take a vacation or buy a car.
So how do you maintain separate business and personal financial accounts but use business profit to pay for things in life? Business owners do this by paying themselves a salary, taking a draw, or a combination of both. The method you choose to pay yourself depends largely on your business structure (LLC, sole proprietor, etc.), if you are an owner, or considered an employee.
You should consult an accountant or tax expert to evaluate your unique situation, but essentially a draw is like giving yourself a direct deposit from your business account to your personal one. No taxes have been accounted for, and you are responsible for paying self-employment tax.
To pay yourself a salary, the payment goes through a payroll process, and some taxes are withheld. As you can see, having a business bank account helps to keep your cash, expenses, payment, and taxes items in order.
What are some features and advantages that business accounts may offer?
Business bank accounts are designed for the needs of businesses, so they often include extra features that personal accounts lack. For example, Azlo accounts come with easy-to-use, in-app invoicing and ACH payments, two features that are useful for many small businesses (and less useful for most individuals). A business account will also allow you to accept checks in your business name, which is much easier — and feels more reputable — than always asking your customers to write checks to your personal name.
What’s the best type of bank account for my small business?
It really depends on what features you need. If you’re looking for a fee-free account that is easy to set up and easy to use, an online banking solution like Azlo could be the right fit.
That said, if you have a cash-heavy business, an online bank account probably isn’t the best solution — a bank with convenient local branches where you can easily withdraw and deposit cash is probably a better fit.
Ultimately, making the right decision comes down to carefully accessing your needs and priorities and then researching the alternatives.
What do I need to open a business bank account?
Opening up a small business bank account can seem like a daunting task — and to some extent, it is more challenging than opening a personal bank account because you’ll have to provide additional details about your business. But there are many ways that a bank account can help your business, so it’s worth the added effort.
The good news: Most financial institutions require the same general documents for each type of business. For example, if you have an LLC, they’ll likely request a copy of the documents you filed with the state to form the LLCs.
The bad news: A lot of the laws that govern how you set up and run your business are unique to your state and local government. That means the exact documents you’ll need will vary from state to state. Your business may also have characteristics (for example, a DBA name, also known as a trade name or fictitious name) that require additional documents.
What documents will I need for my business?
To keep it simple, we’ll go over the documents your bank might ask for when you apply for a business account. We’ll be breaking it down by business type, but first, a note on a couple of documents that might be required for more than one type of business:
A DBA (“doing business as”) document. If you do business under a name other than the legal business name, you may need to provide a document showing that your DBA name has been properly registered. DBAs are especially popular with sole proprietorships and general partnerships. Some states require that you register the name with your state, county, or local government, while others don’t. Learn more about the requirements in your state.
An EIN document from the IRS. If you are a sole proprietor or you have a single-member LLC, you aren’t required to have an EIN unless you hire employees. You do have the option of getting one, however, from the IRS. If you have a different business type, however (corporation, partnership, or LLC with multiple members), you will need an EIN. You can apply for an EIN in just a few minutes online; when you get your EIN, be sure to save the EIN assignment document from the IRS.
Document requirements by business type
To open an account for your sole proprietorship
- EIN document (optional, depending on your business)
- DBA document (optional, depending on your business)
Opening an account for your sole proprietorships is a lot like opening a personal bank account. Your bank will ask for your Social Security number and other personal information. Since the legal name for a sole proprietorship is your personal name, you may want to use a “Doing business as” name. If you do, and your state requires that you register a DBA, you’ll likely need a copy of your DBA document. If you have an EIN, you may also need to provide your EIN document from the IRS.
To open an account for your general partnership
- EIN Document
- DBA document (optional, depending on your business)
- Partnership agreement (this requirement may vary from bank to bank)
General partnerships and sole proprietorships have similar documentation requirements. The main difference is that for a sole proprietorship, you aren’t required to have an EIN and you can simply use your Social Security number. With a partnership, you’re required to have an EIN and you may need to provide an EIN document.
Also, you use a “Doing business as” name for your partnership, your state might require you to register the DBA. If they do, you will need a copy of your DBA registration document.
Finally, some banks will ask for a partnership agreement. This is a document that sets out the terms of the relationship between the partners. It covers things like how much each partner is contributing to the business, the responsibilities of the partners, allocation of authority, use of business assets, what happens when a partner dies, etc. Having these issues worked out in advance provides greater security to the partners — and to outside parties, such as lenders.
To open an account for your LLC
- Articles of Organization
- EIN document (optional, depending on your business)
- Operating Agreement (this requirement may vary from bank to bank)
Your Articles of Organization (some states may call this a Certificate of Organization or Certificate of Formation) is a document that includes basic information such as the LLC name, address, registered agent, and the initial members or organizers. You can typically file this document online. Your financial institution will want to see an official copy that is file-marked by the Secretary of State, which may also include a certificate of authenticity. If your LLC has only one member, you aren’t required to have an EIN (though you can get one if you’d like). If your business has multiple members, however, you are required to have an EIN and your bank may ask for your EIN document from the IRS.
Finally, some banks may also ask for your operating agreement. This is a governing document that sets out the obligations, duties, rights, and roles of the members. Having a good operating agreement can prevent a lot of headaches, so it’s worth making sure this is done right. If you engage an attorney to help form your LLC, he or she will generally help you prepare an operating agreement as well.
To open an account for your corporation
- Articles of Incorporation
- EIN document
- Corporate Bylaws (optional, depends on your bank’s requirements)
Your Articles of Incorporation (also called a Certificate of Incorporation) in some states) are the documents you filed with the Secretary of State to form your corporation. You can typically file this document online. Requirements vary from state to state, so it’s usually a good idea to consult with an attorney before filing your Articles. Your financial institution will want to see an official copy that is file-marked by the Secretary of State, which may also include a certificate of authenticity.
You’ll also need a copy of your EIN document from the IRS.
Finally, some banks may ask you to provide your corporate bylaws. This is the governing document for your business; your corporate bylaws will detail the purpose, name, location, and ownership of the business and generally cover all the formalities of forming, operating, and dissolving your corporation.
Do I need different documents to open an account for a C-corporation vs. an S-corporation?
Generally not. Your bank may ask whether your business is a C-corporation or an S-corporation, but they usually won’t ask for different documents based on your answer.
Hi there! This post exists to offer you (hopefully) useful information but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.
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