The final hurdles you face before beginning your business venture are the day you finalize your business plan, register it as a business entity, and understand how to open a business bank account. You are set as soon as you understand how to open a business bank account.
It will help if you stick by the regulations that govern businesses in your respective jurisdiction from that moment onward.
Opening a business bank account is one of the first regulatory hurdles to jump as a business owner. What you choose not to do can mean the difference between success and failure.
If you are reading this, you are probably a business owner who wants to save money and increase your earnings. You see, having your own business is expensive. It requires a lot of financial resources.
Knowing how to open a business bank account can help you save money and increase your earnings. It can also help you save time in the long run. So, how exactly can a business bank account help you save time and money?
Let’s learn why it is essential for every business to have such an account and what you need to know about how to open a business bank account.
Benefits of Opening a Business Bank Account
Setting up a business bank account is essential when you start accepting and spending money as your business. Standard charges include checking, savings, credit card, and merchant services. Merchant services allow companies to receive credit or debit card transactions from customers online or in-store.
You may also be eligible for perks like low rates on loans and discounts on international wire transfers due to being a small-to-medium sized company – these are just some examples, among many others.
- Protection: Business banking offers limited personal liability protection by separating your business funds from the rest of your money. Merchant services also offer buyer protection and ensure that their information is safe.
- Purchasing Power: With a credit card, your business can make large startup purchases and establish a credit history for your business.
- Preparedness: For many businesses, access to a line of credit is one of the perks that come with having a business banking account. Use it if an emergency arises or if your company needs new equipment.
- Professionalism: With customers being able to pay with credit cards and making checks out to your business instead of you, you’ll also be able to authorize employees for day-to-day banking tasks on behalf of the company.
By understanding these benefits, you can understand the types of business bank accounts available and how to choose them.
Types of Business Bank Accounts
There are many bank accounts these days when it comes to business finance. You might need more than one account, depending on your needs.
Here are the four common types:
- Checking account:
A business account can handle all of the essential financial tasks in your company. Tasks such as writing checks to pay vendors and any other fees, transferring or receiving funds electronically, depositing checks received from customers or clients, and withdrawing money using a debit card are just some examples.
Some banks offer interest-bearing accounts for businesses so you can earn an annual percentage yield which comes with the risk of more expensive costs to maintain this account per year.
Some banks offer a free checking account type called “free business banking” to small businesses. This style may be worth considering if you’re starting on a budget, but it has restrictions like limiting how many transactions you can make within specific time frames.
- Business Saving Accounts:
You could also open business savings account to complement a business checking account. Business savings accounts are outstanding for separating your working capital from the funds needed to manage day-to-day finances. It helps save up some money and put it to work with interest accrued over time.
You’ll have access to emergency funds when things get tight financially without relying on your reserves in times of need. Business checking and savings accounts can be found at brick-and-mortar banks or credit unions, while “digital-only” banks offer online ones; however, they aren’t suitable for everyone.
- Cash Management Account:
A cash management account provides you with banking services like checking, savings, or an investment account without a physical branch.
The best part is that most CMAs offer high-interest rates on savings and lower fees than traditional brick-and-mortar banks. You can conduct all your business’s banking affairs from this CMA.
The following is a list of things to consider when choosing your business bank account:
- Monthly fees.
- Minimum balance requirements.
- Included fee-free transactions.
- ATM access (withdrawals and deposits).
The important features for you, such as bill pay or integrations with other tools, can be added to the comparison algorithm to find the best option for your needs.
What are the Requirements to Open a Business Bank Account?
If you want to know how to open a business bank account, you must understand what documents and licenses are necessary.
- Articles of incorporation
- Business licenses
- Doing business as (a DBA) certificate
- Employer identification number (EIN)
- Identification documents.
Here are more details about these documents you’ll need to know how to open a business bank account.
Articles of incorporation
Articles of incorporation are formal documents filed with a government body to document the founding of a company. They typically contain a firm name, street address, and agent for service process, type, and amount of stock to be issued.
For registering your business with the state and other entities, you need to show bank officials the legal documents that outline how your company is structured.
“If you are forming a company, you could form it as an LLC (limited liability company), limited partnership, corporation, or other entity,”
According to Tiffany Wright of Cogent Analytics’ The Resourceful CEO advisory firm for small and midsize businesses, it could be an LLC, limited partnership, corporation, or any other entity if you are forming a company. Being a sole owner, you will need an article of incorporation that you filed at the state to open a bank account.
You need a business license to operate your company. When registering your company with the state, they will notify you if it’s required. If it is, then banks will need to see that license for proof of legitimacy and make sure that everything is up to code before giving you an account.
The bank will ask for complete information about your business, such as the name and address, what type of entity (sole proprietorship, partnership, or corporation) they are registered under, and what industry they’re in. Beyond that information, there should also be details about their operations.
Doing business (a DBA) certificate.
A DBA, also known as a “fictitious name,” allows you to conduct business under another name without forming a new organization.
For example, Imagine there is an entrepreneur named Tom Johnson. He is the sole proprietor of his own company, and he wants to open up a sandwich shop called Subs ‘n Chips, but he doesn’t want this business running under his name-Tom Johnson-.
The fact that he registered for the DBA means that it will be possible for him to take actions like signing checks made out on behalf of Subs ‘n Chips.
Employer identification number (EIN)
If you are a sole proprietor, the following is needed to get an EIN: your Social Security number and either a driver’s license or passport. It also prevents identity theft, fraud, and money laundering.
Banks will typically allow a sole proprietorship to open accounts with just their Social Security number if they don’t have an EIN- it is still beneficial for them to create one. The essential purpose of having an EIN for employees is to file taxes accurately and employ people.
Before opening up an account online, there needs to be some form filled out for taxpayers (Form SS-4), including obtaining your employer identification number (EIN). Apply online through the IRS website after filling out some forms; you’ll receive this immediately.
Ensure you have your driver’s license with you. Banks need to see that you are who you say, and they will only accept identification from a government-issued picture ID such as a driver’s license or passport. If the bank has an official business partner, they’ll need their ID too.
Along with this proof of identity, it is best to provide other documents proving your identity, like company records or copies of articles in the media about your work that mention name recognition.
Professional business bank accounts help you manage your small-business finances in an organized and professional manner. If you’re wondering how to open a business bank account, these documents need to be gathered, licenses acquired, etc.
Before accepting your first payment for goods or services, one of the best times to open a business bank account is during the incorporation process, which you can also do online these days.
You cannot open a bank account until your company has a license to operate and an identifying tax number (which will likely be either an employer identification number or Social Security Number for sole proprietorship).
Opening a bank account for a business can be daunting, but it doesn’t have to be. Keep these tips in mind to understand how to open a business bank account to avoid pitfalls.