When should a small business open a business bank account, and what steps should business owners take when they are looking at opening a business checking account? Unlike common advice many business owners get, the best time to establish that business checking account is pretty much right away.

Sometimes it’s hard to distinguish between a small business owner and the actual small business he owns. In a way, you are your small business. So, technically, you can use your personal checking account for small business transactions, if your bank allows this. Most banks will insist that you open a separate business checking account for your small business, especially if you are processing a large number of transactions each month. While many banks will require business owners to open a business checking account, opening a business checking account offers the business owner many benefits, too, just as having a business credit card can make a lot of sense for a small business owner.

When Is the Right Time to Open a Business Bank Account?

The right time to open a business bank account is as soon as you form a small business. Opening a business checking account is an integral component of having a good financial plan for your business, and one of the first steps that successful business owners take. As soon as you have filed for and received your Employer Identification Number for tax purposes you should start looking into opening a bank account.

It is important to remember that business bank accounts are not just limited to checking accounts. In fact, business owners are able to open savings account, credit cards, and more – oftentimes at the same financial institution.

What Do You Need to Open a Small Business Bank Account?

Opening a small business bank account is relatively straightforward. To open a small business bank account, you will most likely need the following information, documentation, and credentials:

  • Social Security Number (SSN) – You will need a social security number if you are a sole proprietor to open a small business bank account. But you will need this to open personal accounts as well, so this shouldn’t be too big of an issue.
  • Employer Identification Number (EIN) – EIN numbers are required for small business bank accounts being opened for corporations, partnerships, or limited liability companies (LLC). You can apply for an EIN number when you file to incorporate your business.
  • Government-issued photo ID – This can be either a driver’s license or a United States passport.
  • Business License, Articles of Organization, and Your Partnership Agreement – In addition to your EIN and ID, you may also be required to provide documents related to the organization of your business.

Once you have business accounts, what are some of the benefits?

Protection

First and foremost, business bank accounts provide a level of protection not only for you and your business but for your customers as well. Using a business bank account enables owners to keep their personal assets and personal funds separate from their business. It also allows them to maintain a separate accounting of their business revenue and business transactions. With a business bank account, there is no confusion surrounding how much cash flow your business has, which assets belong to the business owner and which assets to the business, and more.

Ultimately, by keeping your personal and business accounts separate, you can more effectively shield your personal assets from any liabilities that you may incur on account of your business. One of the key protections that has allowed American businesses to thrive is the fact that different business structures, like LLCs, provide individuals and their personal assets with protection from anything that might go wrong with their business – such as defaulting on debts. However, if your personal and business finances and all mixed together in the same accounts, it could become almost impossible to separate them and identify which assets really belong to which entity (you or the business). This could leave your personal financial well-being in jeopardy if something goes wrong with your business. As such, it is imperative that small businesses and their owners have separate bank accounts. Otherwise, you could dramatically and needlessly increase your liability and risk exposure.

Organizational Structure

With a business checking account, customers will be able to pay your business directly with credit cards and debit cards. They’ll also be able to make out checks to your business instead of your – a critical component of keeping your personal assets and your business’s assets separate. Additionally, having a business checking account will enable you to authorize employees to complete banking tasks on behalf of your business, removing some of the many tasks associated with running a successful business from your plate. Business checking accounts also enable you to keep all your accounting records organized and in order. This way, you will be able to easily monitor the entirety of your business’s operations, including profitability, cash flow, revenue, and more. In turn, you’ll be able to make more accurate decisions and forecasts for the future.

Opening your own business probably means that you want to grow it over time and make it as successful as possible. In order to do this, you’ll need to have a clear picture of your business at all times and a strong organizational structure to facilitate growth. This will be almost impossible if you don’t have your own business bank accounts. Having your own business bank accounts will help you keep your finances in order and prime your business for future growth and success.

Stability

Business accounts are a critical component in establishing a strong credit history for a small business. This becomes even more critical when a small business is looking to expand or obtain additional capital. Small businesses are often seen as very risky borrowers, which means you will need great credentials to get good loan terms. Plus, having a business checking account means you will already be building a strong relationship with a potential future lender. Don’t forget that once you have established a strong small business with a sophisticated financial infrastructure a line of credit is also an option. Lines of credit are great for small businesses, since they can provide them with immediate access to cash flow. Whether you are in need of cash during a business emergency or just looking to smooth out your company’s cash flow, an pre-established line of credit can get you immediate funding.

During the early stages of building a small business, personal credit history is a huge factor in obtaining financing, since your business will not have a track record to show lenders. However, your personal credit history can only get you so far. As your business grows, you will need to start relying on your business’s finances and credit history to obtain loans. Setting up your financial accounts in a proper and systematic way now will make this much easier when the time comes to grow your business. When budgeting and researching, make sure to see if there is a fee for going below a minimum balance, overdraft protection, a monthly maintenance fee, or any other types of account fees. Having separate business banking accounts will enable you to build a strong credit history for your business and prove its financial viability when needed.

Saving Money with Business Bank Accounts

Many small business owners do their personal banking at the same place that they do their business’s banking. This makes sense from a convenience standpoint. However, it may not make sense from a financial standpoint. Whenever you are choosing a bank account for yourself or your business, you need to put in time to research the different options and benefits of different accounts and banks. What makes sense for your personal banking may not make sense for your business’s banking, and you should shop around to find the best option. Business accounts often have very different fee and incentive structures than personal accounts. Obviously, you want an FDIC insured bank account, but you also want to make sure you are not paying high transaction fees or monthly fees. Research is critical in choosing the right business bank account.

A One-Stop Shop for Banking

Having a business bank account can also save you a lot of time. Most banks these days offer mobile banking, online banking, and paperless statements and transaction records. This means that you can monitor your business’s finances and transactions at any place at any time. This sort of work has never been more convenient.

One problem some small businesses face is that they have too much cash on hand. This can result in idle cash sitting around and losing value with inflation. Many banks offer money market accounts and other investment accounts where small businesses can invest their excess cash and earn strong returns. This helps mitigate the losses you will incur from having cash just sitting around in a bank account.

Having multiple accounts with one bank also means that you can take advantage of the entirety of their services and benefits. Many banks will be able to provide your business with business credit cards (these typically come with rewards, cash back, etc.), for example. Further, having multiple accounts and a certain amount of money with a single financial institution may enable them to waive fees for you, saving your small business money in the long run. Plus, you will have easy access to all the information about your business’s finances all in one place. This makes it much easier for your business and any accountants you may hire to navigate the tax season and deal with the Internal Revenue Service (IRS).

Interest

As noted, most bank accounts offer interest of some form. Bank interest rates are notorious for being incredibly low, especially over the last few decades. However, that doesn’t mean you should totally pass them up – after all, a dollar is a dollar!

That said, if you have large amounts of cash sitting in your business bank accounts that you don’t plan on using in the near future for investing in the business (i.e. making a down payment on a new storefront, etc.), then you definitely do not want to leave it sitting in a low-interest savings account. Instead, you will want to consider doing something more proactive with your extra cash so that it at least holds its value with inflation.

Staying On Good Terms with the Internal Revenue Service (IRS)

Business bank accounts make tax preparation a lot easier when tax season arrives and being able to see a clear track record of all your business’s transactions is something you will appreciate having when that moment arrives. Having accurate business records will make it much easier for you to deduct business expenses from your revenues, saving you and your business money. Plus, not having your personal and business finances intertwined will help you avoid penalties from the IRS in the future.

And then there is the one word that no small business owner wants to hear – “audit.” It is actually true that only about 1% of businesses in the United States are audited, which really is not that many in the grand scheme of things. However, that doesn’t mean you won’t be part of that 1%. For any small business, being audited is always a possibility.

If you do have to go through an audit, there is no doubt that you will want all of your transactions in one place. And if your business and personal finances are intertwined, the audit process could turn into a never-ending nightmare and end up costing you a lot of money. If that is the case, you will have to sort through all the transactions and separate them into personal and business transactions. This could be nearly impossible, especially as time progresses and transactions fade out of memory.

Looking at a transaction 6 months later, it could be very hard to determine whether it was a personal expense or a business expense. While you might think this is a natural mistake – and in many ways, it is – the IRS won’t care. Mistakes can be extremely costly and expensive in the business world, so you have to be proactive to prevent them from ever taking place.

Obtain the Benefits of Small Business Credit Cards

Opening a small business bank account with a large bank like Chase or Bank of America can also give you access to an array of small business credit cards with great perks.

These cards can provide you with a myriad of benefits that can help both your business and you personally! These include, but are not limited to, the following:

  • No annual fees: Many small business credit cards now have no annual fees. This can be great for small businesses that don’t have a large revenue inflow and expense outflow since this means you might not acquire enough points through your spending to justify a high card fee.
  • Travel perks: The travel perks that come with small business credit cards can also be great! After all, who doesn’t love to travel? These perks can help you out by lowering the cost of both business and personal travel.
  • Business-specific rewards: There are many things that businesses buy each and every day that regular individuals do not. For example, most individuals don’t buy a lot of printer paper at the local office supply store – but as a business, you might buy reams of paper by the truckload! Many business credit cards will have special spending categories that give you extra rewards and points for these purchases. As such, having the right credit card for your business can make a huge difference in terms of rewards.

Building a Relationship with a Bank

Relationships are incredibly important in the business world, and the same goes for small businesses. Opening a business checking account and supplementing that with a savings account, credit cards, and more through the same provider means they will be more eager to provide you with quality service day-in and day-out.

Plus, having a series of “bundled services” at a single bank can help reduce your overall fees, since the more money and accounts you keep with a bank, the better the terms typically are. More favorable terms can make a huge difference in the long run.

Choosing the Right Bank Account

Not all bank accounts are the same and many small business bank accounts have different benefits, perks, and offerings. You should take a little bit of time to research and shop around before opening a bank account for your business since it will probably be the bank account you end up using for the duration of your business’ lifetime (moving banks can be a real nightmare).

Here are a few factors you should pay close attention to while choosing a bank:

  • Cash Deposit Limits: Some bank accounts charge a cash-handling fee that kicks in after you deposit a certain amount of cash into your business’ bank account during a set period. If your business handles a lot of cash and you expect to make a lot of cash deposits, you will want to be wary of this.
  • Interest Rates: Different bank accounts offer different interest rates. While this shouldn’t be the only thing you consider, having a higher interest rate can make a real difference, especially if your business must hold a large amount of liquid cash in a checking account at any given time.
  • Fees: Fees are one of the most important factors you will need to consider. Make sure you understand all the fees associated with a bank account before opening one.
  • Transaction Limits and Fees: Some bank accounts limit the number of transactions you can make a month. After you exceed that limit, you will have to pay a per-transaction fee. Make sure you are aware of any transaction limits your account might have.

Overview

Having a business bank account is incredibly important for any small business, regardless of size. Don’t make the mistake of thinking you can get by without one – the consequences down the road could be devastating on account of liability issues. Plus, with the ease of online and mobile banking these days, opening a small business bank account has never been easier! So, there is really no excuse to not look into opening one today. Every successful, prosperous, and growing small business has its own accounts – so position yourself for the success you desire today!

Biz2Credit

At Biz2Credit, we are constantly working to provide our readers and viewers with the latest up-to-date information about small business trends across the nation. With the COVID-19 pandemic and the impact it has had on small businesses, this mission has never been more urgent than it is now – and we understand that. So, please continue checking back here at our Biz2Credit Blog for the latest insights and news.

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