How to Open a Business Bank Account
Opening a business bank account is crucial for managing and growing your business. Keep personal and business finances separate, gather necessary documents like ID and business license, and choose the right account type. Banks and credit unions differ in ownership, services, rates, and fees. Opening a business account is important when legally establishing your business, accepting payments, hiring employees, seeking loans, protecting personal assets, and enhancing professionalism.
Opening a business bank account can be a key step in formalizing and growing your business. It's important to keep your business and personal finances separate for accounting and tax purposes. Regularly review your account activities and balance, make use of the banking services that benefit your business, and keep all your bank statements and banking documents organized and stored safely.
Please note, this is a general guideline and the exact process may vary based on your country, state, and the specific bank's policies and procedures. It's always a good idea to consult with a business advisor or attorney to understand the best practices and legalities for your specific situation.
Business Bank Account Checklist
Here's a complete checklist of what you need to open a business bank account:
- ☐ Government-issued photo ID (some banks may ask for two).
- ☐ Home mailing address.
- ☐ Personal phone number.
- ☐ Personal email.
- ☐ Date of birth.
- ☐ Social Security number (or Individual Taxpayer Identification Number).
- ☐ Legal name of your business.
- ☐ Any "Doing Business As" (DBA) names.
- ☐ Address of your business.
- ☐ Business phone number and email address.
- ☐ Business website, if applicable.
Legal and Tax Documents
- ☐ Employer Identification Number (EIN) (or Social Security number for sole proprietors).
- ☐ Business license with the name of your business and the owner's name(s).
- ☐ Articles of Incorporation (for corporations) or Articles of Organization (for LLCs).
- ☐ Partnership agreement, if applicable.
- ☐ Fictitious Name Certificate or DBA Proof, if applicable.
- ☐ Ownership Agreements, if applicable.
- ☐ Certificate of good standing, usually for businesses older than one year.
- ☐ A resolution giving you authority to open the account if your company has multiple owners or operates on a board/advisory structure.
- ☐ The amount of money you're planning to deposit to open the account.
- ☐ Projected annual revenue (Some banks may ask for this).
Different Types Of Business Bank Accounts
Here is a brief review of the common types of business bank accounts, their benefits, and potential drawbacks.
1. Business Checking Account
A business checking account is the most basic type of business bank account. It functions much like a personal checking account, allowing for a high number of transactions, including deposits, withdrawals, and transfers.
Easy access to funds, ability to make many transactions, often comes with a debit card for business expenses and enables you to accept credit card payments from customers.
These accounts often have lower interest rates compared to savings accounts and may come with various fees for transactions, maintenance, and minimum balance requirements.
2. Business Savings Account
A business savings account is where businesses can store surplus cash while earning interest over time. These are particularly useful for seasonal businesses that experience periods of high and low cash flow throughout the year.
Earns interest, helps manage cash flow effectively, and provides a safety net of funds for future business needs.
Typically, there are limits on the number of transactions you can make each month without incurring a fee. Also, the funds in a savings account are less accessible than those in a checking account.
3. Merchant Services Account
A merchant services account isn't a bank account per se, but a type of agreement between a retailer and a credit card processing company. It allows businesses to accept credit and debit card transactions.
Increases potential for sales by accepting a wide range of payment options.
They often come with various fees such as transaction fees, monthly fees, and equipment fees.
4. Business Certificate of Deposit (CD)
Business CDs are time-bound accounts that a business can open with a bank. They typically offer higher interest rates than savings accounts, but the money must remain in the account for a set period.
Higher interest rates compared to savings or checking accounts, which means more earnings for the business.
The money in a CD is tied up for the term and early withdrawals usually incur penalties.
5. Business Money Market Account
A business money market account is a type of savings account that typically has higher interest rates than a regular savings account and offers check-writing privileges.
Higher interest rates and more flexibility (such as check-writing abilities) than traditional savings accounts.
They often require a higher minimum balance than other types of accounts and may have transaction limits.
Business Bank Account Benefits
Having a business bank account provides several advantages that can help manage and grow your business. Here are some benefits:
- Separate Personal and Business Finances: This separation is crucial for accurate bookkeeping, tax preparation, and financial management. It also provides a clearer picture of your business's financial health.
- Professionalism: Customers and clients often view businesses with dedicated bank accounts as more legitimate and professional. Plus, checks from a business account bear the business name instead of a personal name, adding to the professional image.
- Facilitates Business Expenses: With a business bank account, you can streamline your business expenses. It's easier to track business expenses for budgeting and tax purposes.
- Liability Protection: For LLCs and corporations, keeping business and personal finances separate is crucial for maintaining the legal protection these structures provide. Commingling funds can compromise the "corporate veil," which could expose personal assets to business liabilities.
- Access to Business Loans and Credit: Banks often require a business bank account to apply for business loans and lines of credit. Having a business banking history can make your business more credible in the eyes of lenders.
- Merchant Services and Payment Processing: With a business account, you can accept payments through various methods such as credit cards and mobile payments. It also allows you to set up direct deposits for employees.
- Interest and Rewards: Some business bank accounts earn interest or offer rewards for business spending, which can contribute to your bottom line.
- Cash Management Services: Many banks offer additional services such as payroll assistance, payment processing, and cash management tools, making it easier to manage your business operations.
When to Open a Business Bank Account?
Opening a business bank account is a key step when starting a new business. Here are some specific instances when you should consider opening one:
When You Legally Establish Your Business
As soon as you have completed the necessary paperwork to legally establish your business—such as registering your business name or receiving your Employer Identification Number (EIN)—it's a good time to open a business bank account.
When You Start Accepting or Making Payments
If you've started to make or receive payments related to your business, it's a good idea to open a business bank account to keep these transactions separate from your personal finances.
When You're Ready to Hire Employees
If you're planning to hire employees and need to set up payroll, you'll need a business bank account to ensure smooth transactions and comply with employment laws.
If You Want to Apply for a Business Loan or Grant
Financial institutions often require a business bank account to apply for business loans or grants. It also helps establish a financial history for your business, which can be beneficial for future borrowing.
When You Want to Protect Your Personal Assets
For LLCs and corporations, having a separate business account can help maintain your liability protection. If you mix business and personal finances, you risk "piercing the corporate veil," which could expose your personal assets to business debts and liabilities.
To Enhance Your Business's Professionalism
Having a business bank account can make your business appear more professional to your customers and vendors, as payments will be tied to your business name instead of your personal name.
Remember, even if your business is small or part-time, it's still a good idea to keep your business and personal finances separate to simplify bookkeeping and tax reporting.
What is the Difference Between a Credit Union Account and a Bank Account?
Banks and credit unions offer similar financial services, but they are structured and operate differently. Here are the main differences:
Ownership and Structure
- Banks: Banks are for-profit institutions owned by shareholders. They aim to generate profits to increase shareholder value.
- Credit Unions: Credit unions are non-profit institutions owned by their members (customers). Profits are returned to members in the form of lower fees, better interest rates, and enhanced services.
- Banks: Generally, anyone can become a customer of a bank, subject to the bank's terms of service and account requirements.
- Credit Unions: Credit unions often have membership requirements. These can be based on factors such as location (living or working in a specific area), employment (working for a particular employer), or membership in a specific group or association.
- Banks: Banks typically offer a wide range of services and products, including checking and savings accounts, credit cards, mortgages, personal and business loans, investment products, and more. Larger banks may have more advanced technology, like robust online banking platforms and mobile apps.
- Credit Unions: Credit unions also offer a range of financial products similar to banks, but their offerings might be more limited, especially in terms of business or specialized financial services. Some smaller credit unions may lack advanced technology, although many have made significant strides in this area.
Rates and Fees
- Banks: Banks, being for-profit institutions, often have higher fees and interest rates on loans and lower interest rates on savings accounts.
- Credit Unions: As non-profit institutions, credit unions typically offer lower interest rates on loans and credit cards and higher interest rates on savings accounts. They also tend to have lower fees.
- Banks: Banks usually have more branches and ATMs, especially national or international banks. Customer service quality can vary.
- Credit Unions: Credit unions are often praised for their customer service, as they are member-focused. However, they may have fewer branches and ATMs, which could be a disadvantage if you prefer in-person service or need frequent access to in-network ATMs.
Ultimately, whether a bank or a credit union is best for you depends on your specific needs and preferences.
Frequently Asked Questions
No, a business bank account should be opened under the legal name of the business, not the personal name of the owner. The bank will typically require documentation, such as an Employer Identification Number (EIN), business license, or Articles of Incorporation, to open the account.
This varies by bank and account type. Some banks require a minimum deposit to open an account, which could range from $25 to several hundred dollars. Others may require a minimum balance to be maintained to avoid fees. Be sure to check the specific requirements of the bank you are interested in.
Both options have their pros and cons. Applying in person allows you to ask questions and get immediate feedback. Applying online can be more convenient, especially if you are unable to visit a branch during business hours. Both methods should result in the same outcome: a business bank account.
Typically, opening a business bank account should not affect your personal credit score. However, if the bank runs a hard credit check during the application process (which is uncommon), it could temporarily lower your score. Business credit cards, loans, and lines of credit are more likely to impact your credit score.
Yes, most banks require a business license or some proof that you're operating a legitimate business. The exact documentation required can vary based on the business structure and the specific bank's policies.
Yes, funds in business bank accounts are protected by the Federal Deposit Insurance Corporation (FDIC) up to the current limit. This means that even if the bank fails, your business's money is still safe up to that limit. Always confirm with your specific bank.