If you’re planning to start a business soon, you’ve likely been faced with a mountain of tasks to complete before opening the doors to your new operation. One of the more essential items on your list is deciding on a business bank account to house your company’s earnings and to pull from to make purchases or cover operating expenses.
This guide dives into business bank accounts, how they differ from personal bank accounts, how to determine if you need one, key advantages and disadvantages they offer and how to open an account. You’ll also learn what matters most when evaluating business bank account options to choose the best fit.
What Are Business Bank Accounts?
As the name applies, a business bank account is a type of account used solely for business purposes. There are several types of business bank accounts to be aware of. More on those shortly.
Are They Any Different from Personal Bank Accounts?
Personal and business bank accounts share many similarities and appear to operate the same. However, there are some key differences between the two to be aware of:
- Business bank accounts offer more legal protections to business owners.
- Business bank accounts can position you for more commercial funding opportunities.
- Business bank accounts can be accessed by your company’s employees.
- Business bank accounts feature merchant services that allow you to take debit and credit card payments.
- Business and personal bank accounts have different fee structures.
- Business bank accounts have more extensive documentation requirements when you initially apply.
Do All Businesses Need Business Bank Accounts?
Business owners not operating as sole proprietors are legally required to separate personal and company finances, prompting the need for a business bank account. However, even if you aren’t a limited liability company, partnership or corporation, a business bank account is still worth opening as they make it easier to manage your company’s financial affairs.
Types of Business Bank Accounts
There are four types of business bank accounts – checking accounts, savings accounts, merchant accounts and investment accounts.
Business checking accounts operate like personal checking accounts. You can use them to deposit earnings, withdraw money, pay bills or make purchases. If you have employees, you can also set up payroll to pull funds from this account. Transactions are conducted via debit card, check or electronic funds transfer (EFT). You can also initiate wire transfers as needed.
Business savings accounts also function like personal savings accounts. Their primary purpose is to store funds for cash flow emergencies or projects you’ll be taking on in the near future. You can request an ATM card to make withdrawals 24/7 instead of visiting a physical branch and asking a teller to pull funds from your account. However, they are not designed to make frequent withdrawals, and you’ll likely be penalized if you exceed six per month. The upside is you’ll earn a higher rate of return on your funds compared to a business checking account.
Merchant accounts equip businesses with the technology to accept debit and credit card payments. They serve as the middleman between the credit card processor and your company by specifying the timeline regarding the delivery of funds. If you open a merchant account, you’ll incur a charge for each completed transaction. Annual or monthly service charges also apply.
Investment accounts are used to house securities, including stocks, bonds, mutual funds and exchange-traded funds (ETFs). Some companies also stow away cash in their investment accounts to multiply earnings. Either way, the assets are typically used in the future to foster growth and expansion efforts.
The Advantages of Business Bank Accounts
There are several benefits business bank accounts have to offer:
Separates Personal from Business Expenses (and Liability)
Commingling business and personal assets is never a good idea. So, experts recommend a business bank account to keep business affairs separate. Plus, you’ll minimize the legal liability against your personal assets regarding claims for unpaid business debts (assuming the debt didn’t require a personal guarantee).
Establishes a Credit Profile for Your Business
Opening a business bank account can be the first step towards unlocking financing solutions for your company. Over time, as the relationship flourishes, you could be eligible for a business loan, credit card or line of credit.
Easily Tracks Business Transactions
You can keep track of your company’s earnings and expenditures in one place. Plus, monthly account statements are easily accessible when you need them. Some financial institutions also feature online tools inside the dashboard that let you categorize spending.
More Organized Bookkeeping and Taxes
A business bank account is especially useful at tax time when your accountant or tax preparer sits down to sort out transactions and file your returns.
Presents Your Business More Professionally
When it’s time for customers to pay up, a business bank account gives your company a more professional image. Instead of writing a check out to you as an individual, they’ll be required to use your company’s name. And if they opt to pay by debit card instead, your company’s name will appear on their bank statement. The same applies to payments made to suppliers and vendors – they’ll be on behalf of your company and not from a bank account bearing your personal name.
Are There Disadvantages?
Unfortunately, business bank accounts do come with drawbacks to keep in mind:
- Some business bank accounts come with pesky account minimums, daily balance requirements and other fees.
- If your company is an LLC with multiple members, a partnership or a corporation with more than one shareholder, you’ll have to share access with the other owners.
What Do You Need to Open a Business Bank Account?
Here’s what you’ll need to open a business bank account:
- Your name, date of birth and address
- Your company’s name and contact information
- A photocopy of your driver’s license, passport or state-issued identification card
- Your company’s Employer Identification Number (EIN) or your Social Security number if you do business as a sole proprietor and do not have an EIN
- Your business license (if required by your state)
- Fictitious business name certificate (if applicable)
- Your company’s articles of incorporation or organization (if applicable)
- Your company’s LLC agreement (if applicable)
Once you’ve gathered the needed documents, schedule an online appointment with a business banker who can assist you with opening your account. If you’re opening an account with an online bank, you can complete the process virtually. You’ll also be able to apply for a business bank account online with certain banks and credit unions.
How to Choose the Best Business Bank Account for Your Business
When evaluating the best type of bank account for your business, here are some questions to ponder:
- Type of bank: Do you prefer a brick-and-mortar bank or an online bank? With the latter, you won’t have the luxury of meeting face-to-face with a banker. However, the fees are generally lower with online banks, and you may have access to more integrations and tools to help manage your company’s finances than you would with a traditional brick-and-mortar bank or credit union.
- Location: Is the financial institution you’re considering located within close proximity to your home or company’s headquarters? If not, do they have locations in areas where you frequently travel? Are the hours of operation convenient for your busy schedule?
- Application process: Can you apply online, or are you required to visit a branch? For the latter, are all owners required to be present if you operate a multi-member LLC, corporation or partnership? What are the documentation requirements?
- Introductory offers: Does the bank offer a cash bonus to new accountholders after meeting certain conditions?
- Minimum opening deposit: Is there a minimum opening deposit? Is it feasible, given the current financial status of your company? Do you find it comparable to that of other banks and credit unions?
- Minimum balance requirement: Are you required to maintain a minimum daily, weekly or monthly balance? Does the figure work for you? Is it realistic based on your company’s sales volume?
- Fees: Does the bank charge monthly maintenance fees? What are the NSF and overdraft fees? Are there other fees you should be aware of? Are there ways to have these added costs waived?
- Financial services: What types of accounts are offered by the bank or credit union? Do they feature loans, lines of credit or credit cards in their business lending arsenal? If there’s a product you’ll likely need in the near future and it isn’t offered, you may want to look elsewhere.
- Interest rates: What’s the average rate of return on business savings accounts? Although the national average is relatively low, the amount the bank or credit union is offering should be at least at or above this figure. (Note: At the time of publication, the average APY was 0.35 percent). Source: Federal Deposit Insurance Corporation (FDIC)
- Transaction limits: Can you make unlimited transactions, or is there a daily, weekly or monthly limit? What types of fees can you expect if you exceed the transaction limit?
- ATM locations: Are there an ample amount of ATMs for your liking? If you’re considering an online bank, do you get access to an extensive network of ATMs or reimbursement for any withdrawal fees you incur?
- Customer service: What forms of support are available to account holders? Can you reach a banker in person, by phone, email, or chat? Or is support only limited to a few of these options? Does the preferred method of contact work for you?
- Mobile deposit: Does the bank or credit union make it easy to deposit cash via ATM while on the go? Can you use a third-party service, like Green Dot, to make cash deposits? Is there a limit on daily cash deposits? Will you be subject to a hefty fee if you exceed the threshold?
- Mobile app: Is the online banking app easy to navigate? Does it streamline the management of your company’s funds while on the go? Can you set up real-time transaction alerts and request assistance through the mobile app?
Open A Business Bank Account
If you are a small business owner, keeping your personal finances separate from your business is probably in your best interest. Also, you need as much time as possible to devote to growing and attending to your business, so having an all-in-one business banking platform will probably also make sense.
Finding a banking platform designed to streamline your business banking experience is your best bet. It makes it easier to manage your finances, receive payments, stay on top of taxes, and access more flexibility. So explore your options and choose a business bank account that comes with all the features you need as a small business owner to manage your finances, payments, taxes and invoices all in one place.
