Starting a new business is an exciting time with so much potential and overwhelm. In the midst of your dreaming and scheming, launching and everything else, you might be forgetting to open a business bank account.
The truth is that opening a bank account for a new business often gets put on the back burner. But, it’s also one of the first things you should do.
Unfortunately, this is just one of those pesky tasks you have to do when starting a new business. I got you on this one.
This is why you’re about to read everything you need to know to open a business bank account, and, hopefully, I’ll make the process a little less painful.
Who Needs a Business Bank Account
You! All kidding aside.
There are business entity options that require you to set up a business bank account.
No. Under the mattress or in a suitcase doesn’t count. Haha.
Sole proprietor
If you’re running your business as a sole proprietor, a separate bank account isn’t required. That’s because you personally own the business, so you can use your personal bank account for both personal and business income and expenses.
While it’s not required, a separate bank account still provides some important benefits. With a separate account, it’s easier to keep track of business income and expenses, and the bank account will be helpful if you’re audited by the IRS.
On top of that, it helps convince the IRS that you’re running a business, rather than merely engaging in a hobby. And establishes that you’re an independent contractor, not an employee.
LLC – Single-member OR multi-member
If you form an LLC, you need a separate bank account in the LLC’s name. And it’s actually a necessity to help separate your LLC from you personally. Trust me. You want to do this.
Your LLC needs to have its own bank account where you deposit all your hard-earned business income and pay for your business expenses.
If your LLC doesn’t have a separate bank account, it can be a problem in the case of a lawsuit. You will be seen as co-mingling funds and your LLC most likely won’t provide you any legal protection. (I’m no lawyer so please consult an attorney if you need help with protecting your assets.)
If you’re still confused about business entities, I’ve got you covered.
Picking a Bank Account
Before you decide where to open your bank account, it’s a great idea to review your options. Believe me when I say there are lots of choices.
Before you open a business bank account carefully consider what services you need and how much, if anything, you’re willing to spend on monthly fees.
While many banks offer low-cost or free accounts for small businesses, be prepared for hidden fees through a traditional bank. There might not be a monthly fee for xxxx transactions per month. However, if you go over that limit, bam, you get hit with a hefty fee.
Whichever bank you pick, review the complete fee schedule before making any decisions.
For each bank, consider the following features and questions:
- Minimum balance: Will you be able to maintain the required minimum balance each month so that you can save on monthly fees?
- Overdraft protection: Do you want/need it?
- Credit card: Do you want/need one?
- Interest: Do you want to earn interest on your business checking account?
- Savings account: Do you want to open a business savings account to go along with your checking account?
- Loans: Will the bank give you preferred rates on long-term loans or a line of credit?
- Online banking: What things can you do online or via mobile app?
- Any extra features: What extras come with your account? This could include sending invoices or receiving help with collecting payments.
Open a business bank account
If you have an LLC, you’ll need a copy of the articles of organization you filed with your state.
Many banks also require that you get an employer identification number (EIN) from the IRS before opening an account in your LLC’s name. Even if your LLC is taxed as a sole proprietorship and the IRS doesn’t require an EIN, some banks still require it.
No problem. It’s free to get an EIN from the IRS.
If you use a name other than your formal legal name to identify your business (also known as a fictitious name or a dba, “doing business as”), you’ll need a copy of the fictitious business name statement that you filed. This allows you to accept payments and deposit checks using that DBA.
Open a Bank Account for a Sole Proprietorship
Are you operating as a sole proprietor and doing business under your own name? Then consider opening a second bank account in your name and using that account solely for business purposes.
I think you’ll find keeping personal and business finances separate will make your life easier. No more guessing if a transaction is personal or business. If you use the same bank for both, then it should be easy to transfer money to pay yourself.
Win-win!
To open a bank account as a sole proprietor, you just have to provide your Social Security number and a photo ID. If your account’s in your personal name, that should be all that you need.
But if you use a name other than your personal name to identify your business, you’ll need a copy of that paperwork to get an account in that name.
For example:
You are a sole proprietor operating under Heather Ryan but you file a DBA to use Tax Queen. Go ahead and add Tax Queen to that bank account. This will allow you to accept checks written out to Tax Queen.
Who do I recommend for a business bank account?
Chances are if you are reading this, then you’re a nomadic entrepreneur or small business owner. This means you’ll be traveling and not able to physically go into banks. Does anyone still do this?!?!
I know I prefer to avoid physical banks. Banking online has never been easier.
I realize there are lots of options out there and here’s why I recommend Bank Novo!
Why choose Novo?
No hidden fees
No minimum balance
Human-powered customer support
Bank-level security
All ATM fees reimbursed
Paying Yourself
When your business is a sole proprietor or single-member LLC, then you should still pay yourself. No one should work for free even if it’s for yourself!
I suggest you set up transfers between your business and personal accounts. This is called an “owner’s draw” or a “personal draw.” Just be sure to stick with using your personal account to pay for personal expenses. No co-mingling of funds.
A Note About Owner Draws: Personal draws or payments to yourself aren’t deductible business expenses. Therefore, they shouldn’t be listed as an expense on your Schedule C.
You don’t report owner draws to the IRS. You can track them for your own purposes if you’d like.
You pay taxes on your net self-employment income, which is your business income minus business expenses (which, as a reminder, does not include your draws).
Paying Contractors
A little reminder that every business expense should be paid through your business checking account. This helps make tracking a little easier. It’s all from one business checking account.
But how do you pay others from this account? You have several options:
- Go old school and write a check – does anyone still do this?
- Use a debit card
- Use the bank account’s bill pay feature if this is provided
- Use a service like PayPal
- Pay contractors via a service like Gusto and they will handle all the tax requirements!
So by now, you’ve probably figured out that it’s important, as well as convenient, to have an official business bank account. What are you waiting for?
