How to Set Up a Business Bank Account Simply
Even though you are swamped and you can't possibly add another task to your mile-long to-do list, you need to make sure opening a business bank account is on that list. It's one of the most important steps you need to take when establishing your small business.
There are many benefits to business banking, one of which is keeping your personal and business transactions separate. An account separate from your personal transactions will make it easier for you to manage your business's cash flow. A business bank account also presents a professional image with your suppliers or vendors.
This article will discuss why setting up a separate business bank account for your company is important. We'll also list the requirements you may need and walk you through the process.
Types of Business Bank Accounts
There are different types of financial products available for businesses. However, the three types you'll most often need as you establish your company are:
- Business checking account: A business checking account is the first financial product you need to acquire under your company's name. This account is essential to your day-to-day operations. You'll use it to accept payments, pay your suppliers, and keep track of your business capital.
- Business savings account: Eventually, you'll need a business savings account to keep a portion of your profits that you don't need for everyday operations. You can also use it to save for expansion or big-ticket purchases you have planned for your business.
- Merchant services account: A merchant account is a bank account designed to accept credit and debit card payments, Apple Pay or other contactless payments, or eCommerce transactions. There are fees associated with merchant accounts and you'll need to complete more requirements, like disclosing your monthly credit card revenue. Before you apply for one, compare setup fees, per-transaction costs, and maintenance fees.
Merchant services is an all-encompassing term that refers to the hardware, software, services, and financial connections needed for businesses to accept and process all or several types of payment methods from customers. Authorized merchant services providers include banks, credit card processors, and acquiring banks or processors. They're all key players in the electronic payment process. Merchant services providers are needed for efficient processing and disbursement of payment transactions.
If you plan to offer electronic payment methods instead of cash-only or direct deposit, you'll need a way to accept payments. One way to do this is through a merchant account.
Can I Use My Personal Bank Account for My Business?
If you're a small business owner or an independent contractor operating a sole proprietorship, you may use your personal account for your business. However, it is not encouraged because it doesn't separate your personal finances from your business transactions.
If you have a formally structured business structure, such as a limited liability company (LLC) or a corporation, the IRS requires you to have separate accounts for your business.
Aside from keeping your personal and business finances separate, here are a few reasons you need to open a business bank account:
- Establish a credit profile for your business: Similar to a person, your business will need to build credit so you can apply and get approved for a business credit card, loans, and other types of financing. A business account is a great way to start that relationship with financial institutions. You'll also need a business account before you can apply for a merchant services account.
- Makes cash flow management simpler: A business account makes it easier to keep track of your income and expenses. Effective cash management is one of the crucial foundations of building and growing your business.
- Save time with bookkeeping and tax-filing: A separate account for your business transactions makes it easier to find information and keep track of interest charges and borrowing fees for bookkeeping and tax-filing purposes.
- Add credibility to your company: A business account presents a professional image to your clients, suppliers, and peers. It proves the legitimacy of your company and it inspires confidence.
- Help protect personal assets: When you open a separate bank account to accommodate business transactions, you're creating distance between you and your business. The separation can help protect your personal assets in case your company gets sued or needs to pay creditors.
- Create a clear audit trail: In case the IRS chooses to audit your business for any reason, a separate account for business transactions and well-maintained books can help you get out in the clear without a lot of work and stress.
What Do I Need to Open a Business Bank Account?
Here's a general list of the documents you'll need to open a business bank account:
- Your Social Security number (SSN) or employer identification number (EIN)
- Personal identification
- Business license
- Trade name certificate
- Partnership agreement papers
- Organizing documents
Employer Identification Number (EIN)
An employer identification number (EIN) is also known as a federal taxpayer identification number. Businesses are identified through an EIN for all tax purposes, such as paying income taxes and employment taxes. EINs are also used to protect individuals from identity theft and to prevent people from using businesses to commit fraud and money laundering.
You need a valid Social Security number (SSN) to apply for an EIN. However, it's easy and free to apply for an EIN. You can even do it online and get it immediately. If you're a sole proprietor, though, banks may allow you to use your SSN instead of the EIN.
Acceptable proofs for personal identification are government-issued picture IDs, such as a driver's license, state-issued identification, or passport. If you're opening an account for a corporation or an LLC, you must be listed as an officer in the organization papers or the company's owner.
When applying for a business bank account, you may be required to present your business license. The license you'll need for your business varies depending on the laws and regulations of the state, city, or county in which you operate. Check with your local government agencies to see which licenses you need to apply for.
"Doing Business As" (DBA) Certificate
A trade name allows companies to operate using another business name different from the owner's legal name or the company's registered name. For instance, if your name is Kendra Smith and you operate a hair salon, you would have to apply for a trade name to conduct business under "Kendra's Hair Creations."
A trade name may also be referred to as a fictitious name or a "doing business as" (DBA) name. Part of the application process for a business bank account is providing a copy of your trade name certificate to the bank.
When you register your business as a separate legal entity, you create a formal business structure. Organizing documents and agreements vary depending on your business structure. The organizing documents include details about a company and its board members and organizers. The agreements also outline each owner or member's responsibilities, how the company will conduct business, and how it will resolve any issues that may come up.
Check what documentation you'll need to present for your company in the list below:
- Partnerships: Partnership agreement
- LLCs: Articles of organization and operating agreement
- Corporations: Articles of incorporation and bylaws
How to Find the Right Bank for Your Small Business
You may start your search with the bank you use for your personal transactions. Your previous relationship with them may work in your favor. Otherwise, look for a small business bank based on the following:
- Introductory offers
- Interest rates for savings account
- Interest rates for lines of credit and business loans
- Transaction or monthly fees
- Minimum balance requirements
Let Skynova Help You Manage Your Small Business Expenses
With a business bank account, you can build your company's credit, keep your business transactions separate, and organize your tax documents.
Take your organization a step further. With Skynova's accounting software, you can keep your receipts organized, backed up, and in one place. It's an easy way to maintain accurate records of your income and expenses.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant or a tax advisor to ensure you're receiving advice suited to your situation.