One of the first actions you should take as a new small business owner is to open a business banking account. While this is not a complex process—you decide where you want to open your account, gather the necessary documents and apply—there are a few additional steps you could take.
The advantages of a business bank account
Why do you need a separate business bank account instead of using your personal bank account? If you’re serious about running a small business, then you need to start your business professionally. That means:
- Never mingling company funds with your personal money. Never.
- Having checks with a company name on it
- Making it easy for your bookkeeper or accountant (or even you) to keep track of sales and expenses
- A business bank account is the first step in establishing business credit, which you will need as you grow.
- If you plan to accept credit card payments, you will need to open a merchant account, which you cannot open if you don’t have a business checking account.
- Is your business a Limited Liability Corporation (LLC), a C Corp, or any other type of corporation? Then, having a separate bank account is a must. Technically, a corporation is a separate legal entity. You don’t want to breach that corporate shield, or you could lose the legal protections from personal liability being incorporated provides, putting your personal assets at risk.
But even if you’re a sole proprietorship, you may still want to maintain separate personal and business bank accounts because it may make it easier when dealing with the Internal Revenue Service (IRS).
Business bank accounts have a different structure than personal bank accounts, and the application process differs as well.
How do you open a business bank account?
Like most other bank accounts, business accounts can typically be opened online or in person. Depending on the bank you choose, these options may vary. Most banks don’t require a minimum deposit to open an account, but some do, so ask first.
Here are the basic steps you should follow when applying for and establishing a business bank account.
1—Get an EIN: Before you can open a business bank account, you need to have an Employer Identification Number (EIN), also referred to as a Federal Tax ID number. Per the Internal Revenue Service (IRS), if you can answer yes to any of the following questions, you need to get an EIN:
- Do you have employees?
- Do you operate your business as a corporation or a partnership?
- Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers’ cooperatives
- Plan administrators
Having an EIN is necessary when opening a business bank account since it identifies you as a legal business entity. You can apply for your EIN from the IRS after you’ve legally established your business entity in your state.
If you are a sole proprietor, you don’t need an EIN to open a bank account; your social security number will suffice.
2—Compare your banking options: Business bank accounts range from those providing basic banking services to those servicing more complex business needs or enabling sales transactions. First, what do you expect your bank to do? What will you use the account for? Standard banking services? Or will you also use it to accept payments? Do you need an account that offers merchant services? Knowing the answers to these questions will help you figure out what features you should look for when comparing banks and their account options
Here are some things to keep in mind:
Fees: Since business checking accounts often involve larger, more frequent deposits, the fees charged differ from those of personal accounts, so you’ll want to compare fees closely to understand how they are structured, including:
- Activity limits: Will your business make frequent or high dollar transactions? If so, make sure you know if there are monthly activity limits and how that would impact your account.
- Maintenance fees: Some accounts require you to maintain a minimum monthly balance to avoid paying a monthly fee. If your cash flow is steady, getting a checking account with minimum balance requirements may save you money.
- Automated Clearing House (ACH) transfers: Will you need to transfer money between accounts frequently? If so, look for a bank account that allows free ACH transfers.
- Interest checking and saving: Some business accounts earn interest. Compare rates and requirements to see if you can make a little extra cash through your account.
- Merchant accounts: If you plan to accept debit and credit card transactions, look for a bank that offers merchant accounts.
- Online/mobile banking: Online banking is a convenient and easy way to bank. Try looking for accounts that offer features like low-balance alerts and transaction notices, online bill pay, and mobile check deposit.
- Account management tools: Ask your bank about any account management solutions they provide, such as an integration with QuickBooks or another platform that can help account management productivity.
According to the Small Business Administration, you should also check out these features when comparing banks:
- Introductory offers
- Availability of and interest rates for lines of credit
- Transaction fees
- Early termination fees
- Minimum account balance fees
3—Consider your future needs: While setting up your business account is an immediate priority, as a new business owner, you have to think long-term. How do you anticipate your needs changing as your small business grows? Will you need an expansion loan in the future? Do you need help handling payroll? (You likely will; there are so many rules and regulations that impact payroll.)
Consider looking for banks (and a banker) that have experience with and understand your industry.
4—Organize and apply: Once you’ve finished your research and decided what account and which bank is best for you, it’s time to gather the necessary information and paperwork and apply.
While it could vary depending on the bank or type of account you’re opening, you will likely need to bring:
- Business documentation. While your EIN shows proof your business is registered with the IRS, your business formation documents prove you’ve taken the appropriate steps to establish your business in your state. These documents, also known as your “Articles of Incorporation” or “Articles of Organization,” help the bank verify what type of business you have (LLC, S-corp, C-corp, LLP) and show who the directors of the organization are.
- Your EIN/Federal Tax ID number
- The name and address of your business/certificate of assumed name/DBA
- The date your business was established
- The state in which your business was formed
- The state in which your business operates
- Your Social Security Number, address and date of birth, and that of any of other owners
- Your business licenses
You will also need to show your personal identification when signing up for your business account. This helps the bank verify who you are and confirms you are indeed an official member of your business. This is more of a formality, but you must have identification with you, or else you’ll have to come back another time.
What if you have bad credit?
If you have a bad credit history, it may be harder to open a business bank account, especially if you are a sole proprietor. When you apply, most banks will check your banking history with ChexSystems, which is to banking what the credit bureaus, like Experian, are to credit. Your score from ChexSystems is based on your personal banking history.
To see your history, request a free report from ChexSystems, check for errors, see the problematic areas, and clear them up.
Depending on the specifics of your situation and the bank’s policy, they may allow you to open an account, but place restrictions on it, such as not giving you overdraft protection, a line of credit, or a business credit card, or charge you higher fees.
In this case, your best bet is to open a basic business checking account and start rebuilding your banking history.
This is another reason to incorporate your company since that creates a separate legal entity not tied to your personal history.
Consider opening up your business checking account at a credit union, where they may be more open to working with you. Ask the credit union if they consult ChexSystems before allowing someone to open an account.
Finally, you don’t need to navigate your finances on your own. Think of your bank as a resource to help guide you through the process and help set you up for success.