Tracking your business’s spending, profits, and various transactions can be a time-consuming task. Fortunately, you can simplify the process by using a business bank account.
A business bank account consolidates your business’s funds, making every transaction easily accountable. In this post, we’ll cover everything you need to know about how to open a business account.
- A business bank account holds company funds and allows transactions related to the business.
- You’ll need personal and company identification, licensing, and tax documents to open a business account.
- There are different types of business bank accounts, each providing different services and benefits to companies.
What Is a Business Bank Account?
A business bank account is a transaction account that enables you to make transactions and receive money in your company’s name.
With a business bank account, you can receive payments from clients, pay your employees, save profits, and withdraw cash for day-to-day business expenses.
Banks and credit unions design business accounts to cater to businesses’ specific needs. They achieve this by including features such as invoicing and payroll.
Types of Business Bank Accounts
There are several types of business bank accounts, each suitable for particular businesses and needs, including:
- Business checking accounts.
- Business savings accounts.
- Merchant accounts.
- Business certificate of deposit accounts.
Business Checking Account
A small business checking account is designed for day-to-day cash deposits and withdrawals. Business checking accounts typically have monthly account fees. When you open a business checking account for your company, you’ll have access to a myriad of deposit and withdrawal options, including:
- Wire transfers.
- Electronic transfers.
- Mobile check deposit.
- ATM transactions.
- Debit card transactions.
The various withdrawal and deposit methods make it easy to access funds for daily small business expenses and safely transfer earnings to your account. Good business checking accounts integrate with tools such as accounting software to simplify bookkeeping.
Business Savings Account
If you have company funds that you don’t intend to use for recurring business expenses, it’s best to put them in a savings account. Business savings accounts are designed to hold funds that earn competitive interest over time.
While a business checking account allows unlimited withdrawals, you can only make six fee-free withdrawals from your savings account each month. This is because the savings bank account model is not meant for constant withdrawals. Once you exceed six withdrawals, your bank will charge you transaction fees for every additional withdrawal.
Banks make money by loaning your savings to other people at high-interest rates, then paying you a lower interest. When you exceed transaction limits, it affects the bank’s ability to make a profit, which paves the way for fees and penalties.
Do you intend to accept credit cards and debit card payments from your customers? If so, you’ll need a merchant account.
A merchant services account accepts and processes credit card payments and debit card transactions. To use this type of account, you’ll need to open a checking account first. When customers pay using cards, the funds go to the merchant account before being transferred to your other business bank account.
Merchant services accounts come with their own set of fees separate from the business bank account you’ll be transferring your money to. These include fees for credit card transactions, address verification fees (AVS) and monthly minimum fees. Before opening a merchant account, it’s crucial to determine whether your small business earnings are worth the costs.
Learn about what a merchant cash advance is and how it can benefit you if you accept both credit cards and debit card payments.
Business Certificate of Deposit Account
A business certificate of deposit (CD) account allows you to save money while earning you more interest than a basic savings bank account.
When you deposit money into a CD account, you agree not to make a withdrawal within a specified period. The longer you keep your money untouched in your CD account, the higher the interest you’ll earn.
Withdrawing money from your CD account before maturity leads to steep penalties. If you think you’ll need to access your savings before the set period, it’s best to consider opening a standard savings account instead.
Requirements for Opening a Business Account
Here are the most common business bank account requirements:
- Employer identification number (EIN) or social security number (SSN).
- Personal identification.
- Business licenses.
- Certificate of assumed name.
- Organization documents.
Employer Identification Number or Social Security Number
The Internal Revenue Service assigns you an Employer Identification Number (EIN) for identification purposes. You’ll apply for an EIN when starting your business.
When opening an account, an Employer Identification Number is required to prove your company’s identity. Some banks allow sole proprietorships to use the owner’s social security number in place of an EIN. Here’s how you can open a business account with EIN.
You’ll need to submit documents proving your identity, usually a driver’s license or passport. Banks check identification documents to ascertain your identity and connection to the business you’re representing.
When you start your small business, you’ll need to apply for business licenses from your local or state government to show that you’re authorized to operate. Banks will need to see your business licenses to prove the existence and legitimacy of your company. A business license also holds vital identification details such as the owner’s name and the business name.
Certificate of Assumed Name
An assumed name is a term that your business trades as but is different from the legal business name.
For instance, let’s say your business’s legal name is XYZ Spa, but you decide to trade as XYZ’s. In this case, XYZ’s is your assumed business name, and you’ll need to file it with your state. Officially, it’s referred to as a “doing business as” (DBA) name.
If you apply for a DBA, you’ll be required to provide a copy of the filing documents to your bank when opening business bank accounts. Find out more about opening a DBA checking account here.
Before a bank or credit union allows you to open an account for your business, they’ll need information regarding the following:
- The activities your company participates in.
- The managerial structure.
- Business address.
- Registered agents.
When registering your company, various organization documents you’ll file with your state or the local government will include these details. Therefore, you will need to gather all the necessary documents for your bank account registration.
How To Open a Business Account
Here are five steps to opening a business account:
- Choose an account.
- Choose a bank.
- Gather your documents.
- Open the account.
- Deposit funds.
1. Choose an Account
When opening a business bank account, the first step is choosing the type of account you need. Each business model has certain needs that can only be met by a particular account. For instance, the best small business bank accounts for an LLC might not be as favorable for a sole proprietorship.
It’s crucial to factor in your business’s specific needs when choosing an account. Are you looking for a place to stash away your business profits for the long term? A savings or certificate of deposit account are excellent options. Are you interested in an account where you can deposit daily earnings and make frequent withdrawals? A business checking account is more suitable.
Settling on the ideal account for your business protects you from paying unnecessary monthly fees or penalties during transactions.
2. Choose a Bank
After choosing an account, look for a bank with the best offer. Most credit unions and banks offer multiple types of business accounts. However, the features and monthly service fee associated with each account vary from one financial institution to the other.
For instance, some banks have minimum balance limits while others don’t. Also, online banks usually have no monthly maintenance fee, unlike traditional banks. Therefore, it’s essential to compare different institutions to ensure you get the best deal.
Other factors to consider when comparing banks include available transaction methods, mobile banking app services, bill pay, and whether they can offer credit in the future.
It’s also wise to opt for a bank providing various small business resources. If you want to open multiple business bank accounts, it’s recommendable to use the same bank to access personalized services.
3. Gather Documents
Once you’ve identified which bank account you will open, it’ll be easy to determine what kind of documents you’ll need to open the account. Banks provide related details on their websites, so check the business bank account requirements before proceeding to the next step.
Generally, you’ll need identification documents and documents verifying your business’s legitimacy and identity. If you have a limited liability company, ensure to provide the LLC operating agreement document. For partnerships, ownership agreements are necessary.
4. Open Account
You’ll need to visit a branch location or use an online portal, if provided, to open an account. The process will involve submitting information and documents required for a business account. If you meet the requirements, you’ll have your new business bank account opened within minutes.
5. Deposit Funds
Depositing funds into your account is the last step of the process. You can do this through cash deposits, wire transfers from a personal checking account, or writing a check to your business. Once you’re through with this, your new account will activate and be ready for transactions.
Benefits of a Business Account
A business bank account comes with many benefits, including:
- Easier accounting of business funds.
- Builds your business’s credit history.
- Provides convenient access to company funds.
Easier Accounting of Business Funds
As a sole proprietor, you have the option of using your personal accounts for your business needs. But this presents several challenges.
For starters, you’ll have a more challenging time separating your personal and business finances when doing tax reports. This could prevent you from enjoying business tax deductions that you qualify for.
Secondly, mixing up personal and business finances makes it difficult to track company cash flow, making it hard to determine your business’s financial status.
A business bank account for sole proprietors that only holds funds from your company makes both accounting and tax reporting a breeze.
Builds Your Business’s Credit History
Lenders will check your company’s credit score for certain business loans instead of your personal credit. Opening a business account allows you to build your company’s creditworthiness to improve your chances of credit approval in the future. Also, some lenders will need you to have a business account as a requirement for accessing loans or when applying for a business credit card.
In case you have poor credit but need a loan, having a business checking bank account allows creditors who offer bad credit business loans to create cash flow projections to determine whether to approve your request.
Provides Convenient Access to Company Funds
If another person at the company, perhaps a partner, has access to business funds, it’s inconvenient to use your personal bank accounts for business purposes. A business bank account is a safer arrangement.
Also, with a business bank account, you can apply for business debit cards that authorized staff can use for ATM transactions and purchases. This is more convenient than having to make withdrawals at a branch whenever you need cash.
Frequently Asked Questions (FAQs) for How to Open a Business Account
Final Thoughts on How to Open a Business Bank Account
Opening a bank account for your small business is one way to ensure proper cash management. It will also become an essential tool in the future when you need to apply for business loans or business lines of credit. Before opening a business bank account, ensure that it serves your business’s specific needs.