One of the most important things you can do when you own a business is separate your business and personal income. This is important for many reasons, the most important of which are to make things much easier when filing your taxes, and it is beneficial if you ever decide to sell your business.
One of the easiest ways to separate your personal and business finances is by opening a business bank account, such as a business checking and/or business savings (I recommend both). You can also open a business credit card if you need a business credit card for your business operations.
How to open a business checking or savings account
1. The first thing you need is a business
Banks won’t allow you to open a business account simply because you want one. However, owning a business doesn’t mean you need to have a multi-million dollar business complete with a brick and mortar store-front and millions of dollars worth of inventory. Being a sole-proprietor and owning an internet business or an eBay store is usually enough to qualify you for a business bank account.
You may need to prove you have a business. I have an LLC for my online business, and I was required to bring a copy of my Articles of Incorporation from the state when I opened my business bank account. Other common forms of “Proof of Existence” include Certificate of Existence or Status, Certificate of Formation, Charter, Trade Name Registration, non-profit paperwork, or other documentation. Check with the bank regarding their requirements.
2. You need an Employer Identification Number (EIN)
An EIN is a tax identification number for you business; you can think of it as a Social Security Number for your business. These are issued for free by the IRS, and you can get one online in about 5 minutes. You will need the EIN to open your business checking or savings account so the bank can report any interest earned under your business to the IRS. Who can apply for an EIN? Basically anyone with a business, including a sole proprietor. You do not need an LLC or any other formal business registration to apply for an EIN, you simply need to have a business.
Other documentation. As I previously mentioned, I had to provide a copy of my Articles of Incorporation for my LLC, as well as my EIN, SSN, and state Driver’s License. Requirements may vary from bank to bank.
3. Open a business bank account
The first step is finding a bank that offers business checking and/or savings accounts. Most local banks and credit unions offer some form of business banking, but be sure to shop around. There may be different requirements at each branch, and there may be associate fees, minimum balances, or other requirements. My primary personal bank (USAA) doesn’t offer business checking or savings accounts, so I opened a business checking account with a local bank. You may also decide to do what I did and use different banks for business checking and business savings.
Opening a business checking account. I recommend opening a business checking account, even if you don’t think you will use checks very often. Chances are good that you will need to spend money on inventory or other operating costs, and checks or debit cards come in handy (so do business credit cards if you like the cash back and pay them in full each month). I opened my business checking account with a local bank so I could deposit checks in person. They didn’t have any monthly fees or other balance requirements, which was important to me. Unfortunately, they also offered virtually nothing in terms of interest rates for their business savings accounts. So I went online.
Opening a business savings account. I chose to open an ING Business Savings Account because they offer higher interest rates than many business savings accounts at local banks. You should evaluate your needs with the ING Business Savings Account, however, because while it offers great interest rates for a business savings account (among the best in the nation), it does have a few limitations. The first is it doesn’t have check writing capabilities, it is a savings account only. The second is that while you can access the interface from your ING Direct account, you can only transfer money to and from one linked business checking account. This is actually a great security feature if you have multiple employees with access to the savings account, or if someone else controls your business finances.
The benefit of the ING Business Savings Account is being able to save your money with a solid interest rate for those times when you need to make a major expense, such as buying a new computer, purchasing inventory, making estimated tax payments, payroll, and other expenses. ING Business isn’t the only business savings account out there – there are many local savings accounts, and some other national accounts. Be sure to seek out the one that best meets your business needs.
Other steps for opening a business bank account
Each bank may have its own policies regarding new business bank accounts, so be sure to call their customer service department or go in person and ask. It’s much easier to have your paperwork ready to go when you walk in, so you don’t have to make two or three trips to open your account!
{ 7 comments… read them below or add one }
How do you make deposits into your ING account. That’s my biggest hangup with them. I’ve got to have a place for all these checks.
I have everything I can deposited directly into my business checking account, which saves time and is more secure. There are still companies that send checks each month, and I take those to my local bank where I have my business checking account and deposit them in person. Then every so often I make a transfer to my business savings with the funds I don’t need for immediate expenses.
I would’ve loved this article a couple years ago when I had my startup. Another thing I’d mention: due to federal law, most business checking accounts cannot pay interest! I believe there are exceptions for nonprofits, sole proprietorships, and government agencies. Large businesses might avail themselves of “Cash Management” services, but smaller entities might just use a savings account / investments coupled with a no-interest checking.
Split Cents, my business checking doesn’t receive any interest, and the business savings account offered by the same bank offers a minuscule amount of interest. That is why I chose to open the ING Business Savings Account. It takes a little extra work because everything has to filter through my business checking first, but the added interest income is worth it!
For a sole proprietorship, my bank only required me to have a notarized assumed name certificate and an EIN…. along with the personal information you mentioned as well, SSN, DL #, etc.
I’m about to switch to an LLC though. Any advice?
I”m also about to change the name on my business banking account. So, I’m sure that headache is going to be fun to deal with.
I don’t really have any advice about the LLC. In my state it was a simple one page form and a one time $125 application/registration fee. Each state, however, has its own rules.
As for the business account, I would talk to the bank and ask what they recommend. It may be easier to open a new account under your new business name/LLC, then transfer any auto deposits to your new account. Then wait a couple months to make sure everything is working as it should and close the old account.
If I may – in order of preference, you should register your LLC in Delaware, Nevada, or your home state unless you live in California or New York. Most Fortune 500 companies are registered in Delaware, thanks to cheap filing fees and a history of judicial rulings that protect shareholder assets from creditors. Nevada doesn’t have the same court history, but its fees are even cheaper and its reporting requirements simpler. Regardless of where you incorporate, your company still has to be headquartered (and pay state business taxes) in your home state. If you do file in a state other than your own, you might need to register with your state’s secretary of state as a “foreign” S corporation or LLC.