- A business bank account is used for business transactions only, like accepting payments from clients and paying employees and vendors.
- Some businesses aren’t required to open a business bank account, but doing so offers many advantages, including – but not limited to – personal liability protection, fewer headaches at tax time, and a more professional image.
- Finding the right bank isn’t difficult if you know what to look for and which questions to ask.
- This story is for small business owners who want to understand why they should open a business bank account and how to choose the right type of account and bank.
At first blush, using the same account for your business and personal finances seems like the simplest, least expensive option. However, opening and maintaining at least one business bank account that is separate from your personal finances is more prudent, as it makes it easier to track business expenses, present a more professional image for your business, plus you’re able to take advantage of tax deductions and credits available to small business owners while avoiding other tax problems.
However, the services, fees, and amenities offered with a business bank account vary from bank to bank, and different businesses have different business banking needs, which is why you don’t want to sign up for the first offer you see. Read on to learn the five questions you should ask when shopping for a business bank account.
When to open a business bank account – and why you should do so
According to the U.S. Small Business Administration, you can – and should – open a business bank account as soon as your business has an employee identification number (EIN) from the Internal Revenue Service and/or begins to accept or spend money.
The IRS requires that any incorporated business have a business bank account. The rule applies whether the business is structured as an incorporated sole partnership, a partnership between multiple individuals, or a corporation.
Even if your business is an unincorporated sole partnership and isn’t legally bound to open a business bank account, you need one anyway. A business bank account is a prerequisite for obtaining a business loan; lenders don’t approve these loans unless funds can be deposited into a business bank account.
Think you’ll never need to apply for a business loan? Circumstances change, and you may suddenly find yourself in need of a loan to maintain or grow your business. By already having a business bank account, your loan request won’t be delayed or rejected.
What’s more, a business bank account is a must if you want to accept credit card payments for merchandise or services. If you have a retail business, you’ll need a business bank account to accept payments through your point-of-sale system.
Did you know? 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 add to the need of having a business bank account.
Benefits of a business bank account
Beyond complying with IRS rules, opening a business bank account has additional benefits and advantages compared to using a personal bank account to handle your business’s finances.
A business bank account comes with multiple perks and protections for businesses, including the ability to take advantage of tax deductions and credits and protecting your personal assets by separating your personal and business transactions.
With a business bank account, you get the following four advantages.
1. Financial protection for yourself and your business
Keeping your personal finances separate from your business finances by establishing a business bank account safeguards your 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. At the same time, your business’s 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 when you have a separate business bank account. So, too, are generating reports and statements that reflect the true status of your business.
3. Fewer headaches at tax time
Separating your business expenses from your personal expenses is a must 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?]
Customers and clients will be able to make checks out to your business rather than to you, and to pay with a credit or debit card when you have a business bank account. This simplifies your finances – and 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. Each account type has different features.
Business checking accounts
A business checking account lets you handle all the basic, essential financial tasks involved in 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.
Some 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 and are more expensive to maintain as a result.
Certain banks cater to new and small businesses with a free small business checking account offering. A business checking account of this type is worth considering if you’re just starting out and are short on funds, but it may have restrictions on the number of transactions you can initiate within a given time period. Also, certain free checking accounts come with stringent 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 and rack up interest on it. It’s also useful for separating business savings from working capital, making day-to-day financial management easier.
When you open a business savings account, in addition to a business checking account, you’re assured a financial cushion in case of an emergency. You’ll have some cash to survive without revenue or despite an unexpected expenditure – without tapping into your personal financial reserves.
Business checking and business savings accounts are available from brick-and-mortar banks and some credit unions. “Digital-only” banks offer online accounts, though they’re not for everyone. (More about this below.)
Cash management accounts
A cash management account (CMA) is an online account that provides the services of a checking, savings and investment account – 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’s banking affairs from a CMA.
Key takeaway: Types of business bank accounts include checking, savings and cash management.
Finding the right business bank account: 5 questions to ask
As a business owner, you have different needs and priorities than other business owners. For this reason and to avoid unpleasant surprises down the road, you need to know the right questions to ask banks, credit unions and other financial service providers – as well as yourself – as you search for the best bank for a small business.
1. What are the fees and requirements, and is there flexibility with the fees?
Banks typically charge maintenance fees for a business checking account. Some banks waive these fees if you meet a certain minimum balance requirement each month, and many make these requirements relatively low so small businesses have fewer problems meeting them. In some cases, you can get a break on these requirements if you also have a personal account (or accounts) at the bank in question.
With some accounts, transaction fees apply if you exceed a certain allotment of transactions each month, and early termination fees may be charged if you close your account.
It’s common, too, for banks to charge a flat fee if you withdraw funds from other institutions’ ATMs. Some banks charge deposit fees if you exceed a set limit on the amount of money or number of deposits you can complete each day, week, or month.
Similarly, savings accounts have a minimum deposit or minimum balance requirements. Monthly maintenance fees may also apply, depending on the financial institution. However, some banks waive some or all of these if you satisfy other requirements – for example, your business checking account was opened at that institution, and the balance you keep in that checking account remains at or exceeds a set threshold.
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. What services and other options are available?
One example of other services to look for are the mobile apps that many banks now offer. You can use these apps to monitor your balance, transfer funds between accounts, pay bills (individually or via an autopay function) and check on your cash flow – from anywhere – with a mobile device like a smartphone or tablet. A mobile banking app isn’t essential, but the anytime, anyplace convenience of access to your business bank account makes it more than worthwhile to have.
Additionally, while you are in the early stages of launching a business, you’ll probably want to open a business credit card account for business purchases and, possibly, cash advances. You may want to establish a business line of credit (a source of funds you can access on an as-needed basis) or obtain a small business loan. Doing so will likely be easier if these options are available from the bank where you have a business checking account. [Read related article: The Small Business Owners’ Guide to Getting an SBA Loan]
If you plan to accept credit and debit card payments from your customers, you’ll need merchant services so you can process these transactions. Third-party processors offer this service (and usually have lower rates), but it may be more convenient and efficient to use a bank that does so as well.
4. What are your own requirements and preferences?
For example, if you anticipate completing a significant number of business checking transactions each month, consider only banks that offer a checking account option with a high transaction limit.
What’s more, you may be attracted by the lower fees and convenience of an online business checking or savings account, but consider if you’re willing to accept the trade-offs. One such trade-off is the absence of a physical branch, which can be a detriment if you prefer to have in-person contact with banks’ customer service personnel and/or you’re uncomfortable depositing funds online. Some online banks don’t accept cash deposits, so a business bank account at a brick-and-mortar bank may be the way to go if you operate a business that handles many cash transactions.
5. What about fund protection and insurance?
The Federal Deposit Insurance Corporation (FDIC) provides financial institutions with insurance for all types of deposits received there, including but not limited to checking and savings account deposits. Ensure that the bank you choose is FDIC-insured.
What documentation and information do you need to open a business bank account?
Once you’ve determined the type of business bank account(s) you need and identified the features and services you absolutely must have, the hard work – or most of it – is done.
The final step – opening the account itself – isn’t difficult. Just head to a local branch of the bank you’ve selected or log on to its website. You’ll need to have certain documents and information on hand to complete the process. These requirements vary depending on how your business is structured.
All banks will ask for the following:
- 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 DBA (“Doing Business As”) registration.
- Your EIN, if your business is a corporation or an LLC. The bank wants this as proof that your business is legitimate.
- Your business address – the one you used to license your business. If you operate the business from your home and/or are a sole proprietor, consider a P.O. box.
- Your contact information, including your business’s 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
Tip: Be ready to provide a wide variety of personal information and documents when you go to open your business bank account(s). With all of these in hand (and by following the advice we offered above), the process should be smooth.
Business Banking FAQS
Do you need both a business checking and savings account?
According to North Shore Bank, in addition to a checking account, businesses must have a savings account too. The savings account allows for the business to access liquid funds if needed, but especially in cases of emergency. The savings also protect your assets, since each account has an insurance limit. As an example, the federal government will only insure money in each account up to $250,000. If you have a checking and savings account, each one can safely hold up to $250,000.
Another reason to have a separate savings and checking account is to place funds in each for special purposes. As an example, many companies keep money in a savings account to earn interest while building funds to pay off expenses like federal taxes.
What is a free business checking account?
A free business checking account refers to a type of account that doesn’t incur a monthly maintenance fee by a bank. Free business checking doesn’t involve the waiving of other fees. In most cases, you’ll need to maintain a specific minimum balance to avoid paying a 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?
Yes, many business owners find it more convenient to open a business bank account online. The benefits of opening an online business bank account include faster processing. 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 personal and business bank account?
Personal accounts should always be kept separate from business accounts. LegalZoom recommends protecting your personal assets by keeping two different bank accounts: one for personal use and one for business use. A business account allows for easier expense tracking and tax filing. Business accounts also lend credibility to your business, since vendors will receive checks from the name of your business, not your personal account. Both your personal and business accounts can be managed online through virtual banking apps.
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.