Starting a new business is an exciting time with so much potential in the air. And in the middle of your dreaming and scheming, launching and marketing, you’re definitely thinking to yourself, “I can’t wait to take a trip to the bank and open a new account.”
The truth is that opening a bank account for a new business often gets put on the back burner. But, it’s also one of the first things you should do.
The truth is, no amount of clever writing can make opening a business bank account exciting. It’s just one of those things you have to do. But just like your BFF is there for you, holding your hair back after a night out on the town, we’re here for you, too.
Which is why we’re telling you everything you need to know about opening a business bank account, and, hopefully, making the process a little less painful.
Just keep in mind that, although we’ve made every effort to ensure that this information is accurate and up-to-date, it isn’t a substitute for legal advice, and it doesn’t constitute legal advice in any way. To get personalized legal advice, consult with an attorney.
Who Needs a Business Bank Account
If you form an LLC, you need a separate bank account in the LLC’s name. And it’s actually a necessity since your LLC is its own entity, separate from you personally.
Your LLC must have its own bank account where you deposit money that your business earns and pay for business expenses.
If your LLC doesn’t have a bank account, it won’t be viewed as legitimate by courts. What’s the big deal about that? Your LLC won’t provide you, the owner, with limited liability protection from business debts and lawsuits that you’d otherwise get.
If you’re running your business as a sole proprietor, a separate bank account isn’t required by law or the IRS. That’s because you personally own the business, so you can use your personal bank account for both personal and business income and expenses.
While it’s not required, a separate bank account still provides some important benefits. With a separate account, it’s easier to keep track of business income and expenses, and the bank account will be helpful if you’re audited by the IRS.
On top of that, it helps convince the IRS that you’re running a business, rather than merely engaging in a hobby. And establishes that you’re an independent contractor, not an employee.
Setting Up a Bank Account for Your LLC
Before you decide where to open your bank account, it’s a great idea to shop around. Banks want to attract businesses, which means there are lots of options that you can choose from.
Carefully consider what services you need and how much you’re willing to spend on monthly fees.
Many banks offer low-cost, or even free accounts for small businesses with few transactions each month. Expect to have a high volume of transactions? Be prepared to get a more expensive business checking account.
Just be sure to ask for a complete fee schedule from every bank you’re considering so you can compare fees and make the best decision for your wallet.
For each bank, ask yourself these questions:
- Will you be able to maintain the required minimum balance each month so that you can save on monthly fees or even qualify for a free account?
- Do you want overdraft protection?
- Do you want a business credit card? Tip: ask if the bank will give you a preferred interest rate on a credit card that’s paired with a business checking account.
- Do you want to earn interest on your business checking account?
- Do you want to open a business savings account, as well as a checking account?
- Will the bank give you preferred rates on long-term loans or a line of credit?
- What online services are available?
- What extras are available with your account? This could include sending invoices or receiving help with collecting payments.
Open your business bank account with the proper documentation
If you’re running a single-member LLC (SMLLC), you’ll need a copy of your filed articles of organization.
Many banks also require that you get an employer identification number (EIN) from the IRS before opening an account in your LLC’s name. Even if your SMLLC is taxed as a sole proprietorship and the IRS doesn’t require an EIN, some banks will still ask for one.
But, because some banks don’t require an EIN, you might find a bank that will gladly accept your Social Security number to open your account.
Also, if you use a name other than your LLC’s formal legal name to identify your business (also known as an assumed name or a dba, “doing business as”), you’ll need a copy of the fictitious business name statement that you filed in the county where your office is located.
Having this allows you to obtain an account in your business’s assumed name. Alternatively, a bank might accept a copy of a business license in your business’s assumed name.
Setting Up a Bank Account for a Sole Proprietorship
Are you operating as a sole proprietor and doing business under your own name? Then consider opening a second bank account in your name and using that account solely for business purposes.
A great perk is that you’ll usually pay less for a personal account than a business account. Unfortunately, though, you won’t get any of the extra services that banks provide to business customers. Also, if you have a lot of monthly transactions, your bank might even insist that you open a business account instead.
To open a bank account as a sole proprietor, you just have to provide your Social Security number and a photo ID. If your account’s in your personal name, that should be all that you need.
But if you use a name other than your personal name to identify your business, you’ll need a copy of the fictitious business name statement that you filed in order to get an account in that name.
Why is it important to take these steps?
Consider this example: if your business’s legal name is John Smith, and your assumed business name is AAA Consulting, you can open a bank account in the name AAA Consulting by giving the bank a copy of your filed fictitious business name statement. This will enable John to deposit client checks that are made out to AAA Consulting.
When your business is a sole proprietorship or SMLLC that’s taxed as a sole proprietorship, you should pay yourself writing a business check to yourself and depositing that money into your personal account.
Or you can set up periodic transfers between your business and personal accounts. This is called an “owner’s draw” or a “personal draw.” Just be sure to stick with using your personal account to pay for non-business and personal expenses.
A Note About Personal Draws: Personal draws aren’t deductible business expenses, so they shouldn’t be listed as an expense on your Schedule C.
You don’t need to report personal draws to the IRS. But, you should keep track of them, as well as keep them separate from the net self-employment income that you report on your Schedule C.
You’ll pay taxes on your net self-employment income, which is your total business income minus business expenses (which, as a reminder, don’t include your draws).
Every business expense should be paid through your business checking account. This streamlines your tracking because you’ll have a single account showing all of the money that you spent on your business in a year.
What’s the best way to pay others from your account?
- Go old school and write a check
- Use your debit card
- Use your account’s bill pay feature
- Make electronic funds transfers
Tip: If you end up paying with a traditional paper check, but it’s not clear from the name of the payee what the check is for, be sure to describe the expense on the memo line.
Remember — you don’t have to pay all of your expenses by check or by electronic funds transfer.
You can also use electronic payment services like debit cards, credit cards, and PayPal. These are all really convenient and totally fine, but you should fund these payments from your business checking account.
In other words, you should pay your business credit card bill every month with money from your business checking account, and PayPal payments should be funded from that account as well.
Need Help Setting Up Your Business Bank Account?
So by now you’ve probably figured out that it’s important, as well as convenient, to have an official business bank account.
But if dealing with opening your bank account sounds about as exciting as spending the day at the DMV, Collective can help.
Collective is here for you for every step of launching your new business., From forming your business and opening up a business bank account to filing your taxes and helping you stay on top of your bookkeeping, Collective takes on all the boring, so you don’t have to.
Join us today to learn more, and to start taking advantage of the perks that come with opening a business bank account and your very own business sidekick.
Stephen Fishman has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.