- A business bank account should be used for business transactions only, such as accepting payments and paying employees and vendors.
- Some businesses don’t require a business bank account, but a separate account offers many advantages, including fewer headaches at tax time and a more professional image.
- To find the right bank, know what to look for and which questions to ask.
- This article is for small business owners who want to understand why they should open a business bank account and how to choose the right bank and type of account.
At first blush, using the same account for your business and personal finances seems simple and inexpensive. However, if you have an active business, consider opening and maintaining designated business bank accounts. Separate business accounts help you track business expenses, present a more professional business image, and take advantage of tax deductions and credits available to small business owners while avoiding tax and accounting problems.
When to open a business bank account
Not every business needs a business banking account. If you have no employees and only a few transactions per month, you can probably get away without one. For example, if you occasionally take on freelance assignments, your personal checking account may be just fine for receiving the payments.
As your business grows and becomes more consistent, though, you should consider opening a dedicated business bank account. You generally need a separate account if any of the following are true:
- Your business has employees or many transactions per month.
- You’ve applied for an employee identification number (EIN) from the Internal Revenue Service. The U.S. Small Business Administration (SBA) recommends opening a business bank account as soon as you apply for an EIN.
- You operate a business with partners other than your spouse.
- You have an incorporated business. The IRS requires every incorporated business to have a business bank account. This applies to incorporated sole proprietorships, partnerships and corporations.
- You need a business loan. A business bank account is generally a prerequisite for obtaining a business loan. Lenders don’t approve these loans unless funds can be deposited into a business bank account.
- You need a business bank account (also referred to as a merchant account) to accept credit card payments for merchandise or services. Retail businesses need a business bank account to accept payments through a point-of-sale system.
The IRS requires incorporated businesses to have a business bank account. For unincorporated businesses, the ability to get a business loan and accept payments by credit card further underscores the need to have a business bank account.
How to choose a business bank account
The best bank account for you depends on your business. For example, if you anticipate completing a significant number of business checking transactions each month, look for a bank that offers a checking account option with a high transaction limit before incurring fees.
Regardless of the type of business you run, be sure to ask these questions before you apply for an account.
1. What are the fees and requirements?
Most business bank accounts will charge some types of fees and maintain a list of minimum requirements. The following fees and requirements are typical for business accounts:
- Maintenance fees on checking accounts: Some banks waive these fees if you meet certain minimum balance requirements each month. The minimum requirements vary widely by financial institutions. You may get a break on these requirements if you have personal accounts at the same bank.
- Transaction fees: These fees may apply if you exceed a maximum number of transactions per month. They may not apply for small businesses with a low transaction volume, but keep in mind that as your business grows, these fees may come into play.
- Early-termination fees: Some account terms include a fee if you close your account before a certain contractual period ends.
- ATM fees: Many banks charge a fee if you withdraw funds from other institutions’ ATMs.
- Deposit fees: You may pay extra if you exceed a set limit on the amount of money or number of deposits you complete each day, week or month.
2. Is there an introductory offer?
Many banks promote introductory offers as a way to entice business owners to open a business account at their institution. Some offers include bonus cash for making an initial deposit of a certain sum and maintaining the balance for a certain period of time (typically a few months). Others offer lower fees to businesses opening new accounts. If the bank and its account features tick your other boxes, you’re not likely to go wrong by opening your business bank account at an institution with a strong introductory offer.
3. Will the website and mobile app work for you?
Customers now expect to be able to monitor accounts and do banking online. However, all websites are not equal in ease of use and dependability. Check out the website and see how you think it will work for you. Most financial institutions offer mobile device apps so you can monitor your balance, transfer funds between accounts, pay bills and check on your cash flow. Check out the app and make sure it works well for you and with your device.
4. Does it offer merchant credit card processing?
To accept credit and debit card payments from customers, you need merchant services. Third-party processors offer this service (and usually have lower rates), but it may be more convenient and efficient to use a bank. Find out if the bank you’re considering offers merchant processing services and whether the terms and rates are better than those of third-party providers.
5. Does it offer competitive business credit cards and other financing options?
Along with a business checking account, you should have a business credit card account for business purchases. Interest rates and other credit card terms vary, so shop around. Consider establishing a business line of credit (a source of funds you can access on an as-needed basis) or securing a small business loan as well. Doing so may be easier at the bank where you have a business checking account, since it already has access to much of the documentation needed when applying for a loan. [Read related article: The Small Business Owners’ Guide to Getting an SBA Loan]
6. Does it have a bank branch near you?
It can be beneficial to have a local branch nearby in case you ever need to do your banking in person. If you are attracted by the lower fees and convenience of an online business checking or savings account, consider the trade-offs, such as having to deposit checks online. If you need to deposit many cash transactions or you want to be able to speak to a representative face to face when you need help, you may need a brick-and-mortar bank.
7. What about fund protection and insurance?
The Federal Deposit Insurance Corporation (FDIC) provides financial institutions with insurance for all types of deposits, including, but not limited to, checking and savings account deposits. Make sure your bank is FDIC insured.
How to open a business bank account
After you choose a financial institution, opening the account isn’t difficult. Just head to a local branch of the bank you’ve selected or log on to its website. You need certain documents and information on hand, depending on how your business is structured.
- Your business’s legal name, as it appears on documents filed with your state or the IRS; if your business is a sole proprietorship and its name differs from your own, you may need to register your DBA (“doing business as”)
- Your Social Security number, or your EIN if your business is a corporation or an LLC; the bank must have this information for IRS reporting requirements
- Your business address, the one you used to license your business
- Your contact information, including your business phone number, email address and website
- Your driver’s license number
- Other photo proof of identity, such as a passport
If your business is an LLC or corporation, the bank may also require you to provide:
- Your business’s partnership agreement, if you operate a partnership
- Your business’s articles of organization, if it’s an LLC
- Your business’s articles of incorporation, if it’s a corporation
- Your business license
Be ready to provide both personal and business information and documents when you go to open your business bank accounts. With all of these in hand, the process should be smooth.
Benefits of a business bank account
Business bank accounts offer the following four advantages.
1. Financial protection for yourself and your business
Keeping personal finances separate from business finances by establishing a business bank account helps safeguard business and personal funds. For instance, if your business is set up as an LLC, your personal assets won’t be in jeopardy if your business can’t pay its debts, unless you signed a personal guarantee. (Consult with a lawyer about your situation.)
In addition, your business credit score won’t be negatively impacted if you suffer a personal financial crisis or setback.
2. Easier, more organized handling of expenses
Tracking expenses, monitoring spending and avoiding inadvertent overspending – all of which figure heavily into the success of any small business – are easier with a separate business bank account. So too is generating reports and statements that reflect the current status of your business and important trends.
3. Fewer tax-time headaches
Separating business expenses from personal expenses is necessary to take full advantage of business tax deductions without triggering an audit. [Read related article: What Is a Tax Audit? What Do You Do If You Get Audited?]
Another consideration is that if you have a type of business that the IRS may consider to be a hobby, one way you can demonstrate that you are operating as a business is to have business bank accounts.
With a business bank account, customers and clients can make checks out to your business rather than to you and pay with a credit or debit card. This gives your business a more professional image.
Types of business bank accounts
Like personal bank accounts, business bank accounts fall into several categories. Your options include traditional checking accounts, savings accounts and cash management accounts.
Business checking accounts
A business checking account lets you handle all the essential financial tasks of operating your business. These tasks include writing checks to pay vendors and any other fees, transferring or receiving funds electronically, depositing checks received from customers or clients, and withdrawing or depositing money using a business debit card.
Many banks offer interest bearing business checking accounts. These accounts have the same standard features as regular business checking accounts, but you can earn an annual percentage yield. The trade-off with interest bearing accounts is that they often carry fees.
Free small business checking accounts that cater to new and small businesses may be perfect if you’re just starting out, but they may restrict your number of transactions per month. Free accounts also may have minimum deposit requirements.
Business savings accounts
A business savings account complements a business checking account. With it, you’re able to set aside a portion of your business’s earnings into an account that pays interest.
A savings account helps you separate business savings from working capital, making day-to-day financial management easier. Keeping money in a savings account gives you a financial cushion in case of an emergency, such as an unexpected expenditure, without tapping into your personal funds.
Cash management accounts
A cash management account (CMA) is an online account that provides the services of a checking, savings and investment account, all rolled into one.
Most CMAs offer high interest rates on savings and lower fees than traditional brick-and-mortar banks and business lines of credit. You can conduct all your business banking affairs from a CMA.
Types of business bank accounts include checking, savings and cash management.
Business Banking FAQS
Do I need both checking and savings accounts for my business?
Most banks automatically open an account for savings when you open a checking account. The savings account lets you access funds as needed. The savings also protect your assets, since each account has an insurance limit. As an example, the federal government will insure money in each account up to $250,000 per owner. If you have a checking and savings account, each one can safely hold up to $250,000 per owner.
You can also use a savings account to set aside funds for special purposes. For example, many companies keep money in a savings account to earn interest while setting aside money for expenses like federal taxes.
What is a free business checking account?
A free business checking account doesn’t incur a bank monthly maintenance fee. It may still incur other fees. In most cases, you must maintain a minimum balance to avoid the fee. Chase Bank, for example, requires the account holder to maintain a balance of $2,000 for a free business account.
Should I open a business bank account online?
Many business owners find it convenient and fast to open a business bank account online, regardless of whether it’s an online or brick-and-mortar bank. If you’re concerned about security, all paperwork filed online for a new business bank account is done over a secure and encrypted connection.
What’s the difference between a bank and a credit union?
Banks are for-profit institutions, while credit unions are categorized as nonprofits. Credit unions typically offer better rates and lower fees. Membership is typically required to become part of a credit union.
A real business needs a business bank account
There’s a difference between earning a few dollars on the side and starting a business with an intent to grow and make a profit. Opening business bank accounts is just one important step to getting serious about your business and setting your business up to be successful for many years to come.