According to the U.S. Small Business Administration, small businesses (those with 500 or fewer employees) make-up an astounding 99.7% of the country’s total number of businesses. Of these, the majority are non-employer operations, meaning that the sole owner is the business.
In these situations, it’s easy to think that a personal bank account will suffice for managing the transactions and dealings of the business, but if you’re incorporated or have an LLC, this is legally impermissible.
Opening a business bank account may seem inconvenient, especially for a one-man operation. However, it’s relatively painless if you’re prepared and will make managing your business much more straightforward (and save you money on accounting fees) all while fulfilling your legal obligations.
Do I Need a Business Bank Account?
The short answer is that it depends on your business’s structure. Your business structure is the type of legal entity through which you—or a group of other owners—operates the business. For instance, LLCs and Corporations are two common types of business structures, while Sole Proprietorships and General Partnerships are also popular choices.
When a business is incorporated (i.e.. registered as an LLC or a Corporation) owners must set-up a separate bank account to distinguish the company funds from their personal finances. Owners of Corporations and LLCs that fail to distinguish their personal and corporate accounts—whether intentionally or by-accident—put both their business and personal assets at serious risk (this called piercing the corporate veil).
The majority of owners that run small-scale businesses, however, decide not to incorporate. In these situations, the owners are not legally obligated to separate their personal and business bank accounts. Business structures like Sole Proprietorships and Partnerships fall into this category. While owners of non-incorporated businesses aren’t required, by-law, to separate their accounts, it’s strongly recommended by attorneys and other professionals.
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3 Steps to Opening a Business Bank Account
Today, opening a business bank account is a relatively quick procedure. However, an owner should first consider their business’s immediate and future needs before speaking to a banker. Perhaps surprisingly, not all business bank accounts are the same, and identifying the best type of account for your business is often a challenge. Likewise, you’ll have to determine exactly which documents are needed to open an account in your state (this mostly depends on your type of business structure). These considerations can be summarized in three simple steps:
1. Determine the Best Type of Account for your Business
Not all business banking accounts are identical. The simplest type of account is the Free Business Bank Account. As the name implies, these accounts have little-to-no monthly fees (usually as long as a certain minimum balance is met). They are fairly basic, and allow owners to make withdraws, deposits, and transfers, typically through an online interface. While these accounts are inexpensive, they don’t offer much in terms of functionality. Alternatively, more traditional types of accounts—like Business Checking Accounts and Business Savings Accounts—allow owners to make cash-deposits, withdraw from ATMs, or even open lines of credit. Businesses interested in long-term savings should explore different types of Business Savings Accounts like CDs or Money Market Accounts. However, with increased functionality comes higher maintenance fees. In general, an owner should consider their initial and expected balance before committing to an account. Other important considerations include their expected number of monthly transactions, and whether they’re willing to pay additional fees for a greater variety of services.
2. Collect the Required Documentation
Banks will require certain documents before a business bank account can be established. The exact documentation largely depends on your business structure. For instance, Corporation owners need to present their taxpayer identification number as well as their articles of incorporation to the bank before they can establish an account for the business. For Sole Proprietors, banks typically require the owner’s taxpayer identification number (or their social security number) and a copy of their business license.
3. Schedule to Meet with a Banker
Today, banking is largely done online or over-the-phone. While most business banking accounts can be established remotely, some professionals recommend meeting with a banker in-person. This is especially true if you’re interested in more complex types of services for your business, like credit cards, cash management services, or long-term savings accounts.
Before committing to an account, it’s important for owners to consider the different types of fees they may be charged. Monthly service fees are rather standard (even for Free Business Bank Accounts), however transfer fees, cash-deposit fees, and minimum balance fees are also commonplace. These types of costs—whether they’re “hidden” or clearly-stated—can add-up quickly, especially for new businesses.
Although much of this information can be found online or by “shopping-around” for accounts, consulting a business attorney may also be helpful. This is particularly true if your business is looking to expand, or is interested in more complex kinds of financial products and services.
It’s also important to do your research. A well-chosen account will minimize fees and save money for your business, while inappropriately-chosen accounts can be both time-consuming and financially costly for owners. Again, consulting a professional may be helpful in determining the most appropriate type of account for your particular business operation.