LEARN ABOUT BUSINESS BANKING FAST
BEST BUSINESS CHECKING ACCOUNTS
LEARN ABOUT BUSINESS BANKING FAST
BEST BUSINESS CHECKING ACCOUNTS
What Is a Business Bank Account?
After naming your business, a business bank account is one of the first assets you acquire when starting a business. Without a business checking account, you have no way to manage your business income or expenses, accept credit cards, write business checks, build business credit, or run a successful business.
But what is a business bank account?
A business bank is an asset. An asset is anything that makes your business money, whereas a liability is anything that costs your business money.
A business bank account is an asset because it:
- Helps you make smart business decisions. Making smart business decisions ultimately add more revenue to your business, thus making you more money.
- Accumulates interest. Some business bank accounts earn interest, and that money can be used to grow your business, making your business even more money.
- Saves you from paying more in interest and fees. As you save money in your business bank account, you’ll be less needful of expensive business loans that could cost you more money. This savings puts more money in your business.
Types of Business Bank Accounts and Their Uses
The benefits of owning a business bank account far outweigh the costs. But, not all business bank accounts are created equal. That’s why it’s important to distinguish between the good, the bad, and the best business bank accounts.
Business Checking Accounts
A business checking account is the first business bank account you’ll want to open for your business.
It allows you to:
- Accept deposits (over-the-counter cash, checks, credit card, and electronic deposits).
- Pay for business-related expenditures (payroll, taxes, business insurance, vendors, lenders, and everything imaginable that you’ll need to operate your business).
- Keep detailed records of all expenses and income.
- Protect your money. This account is Federal Deposit Insurance Corporation (FDIC) insured, meaning you’re covered up to $250,000 by the federal government should anything happen to the bank or your money.
- Support dual signatures. If you have a partnership or employees, you may wish to make it required that two signatures be present whenever a withdrawal or deposit is made.
Recommended: Learn more about how your money is protected by the FDIC.
Business Savings Accounts
A business savings account is a special business bank account that lets you safely save money in a bank. This account is FDIC insured. You’ll open a business savings account as soon as you have an abundance of capital sitting in your business checking account.
It allows you to:
- Make saving money a habit. The most successful companies (think blue chips like Wal-Mart, Amazon, General Mills, Hershey’s, and General Electric) all have solid reserves of capital.
- Protect your business during a cash-crunch. Incidentally, 80% of businesses fail because of cash flow problems.
- Save money so that you don’t have to take out expensive business loans.
- Maintain liquidity. With a business savings account, you can liquidate assets to buy equipment, purchase real estate, and make other big purchases for your business.
- Build business credit. Yes, having a business savings account can actually help you establish and build business credit.
Business Certificate of Deposits
A business certificate of deposit (CD) is a term account. You agree to lend your business’s money to the bank for a set period of time at an agreed-upon interest rate. The interest rates are usually higher than you’d receive from a business savings account or interest-bearing business checking account.
Here are the main features of a business certificate of deposit:
- It pays out 1% or more in interest. We found some CDs paying over 2% in interest, so check around for the best rates.
- You cannot liquidate the account until the term expires. This means you can’t spend the money.
- The longer the term, the higher the interest rate.
- Different banks offer different term limits. We’ve found some CD terms for a week, months, and even years.
Important: Before purchasing a business certificate of deposit, make sure you do a cash flow analysis to determine how much capital, and for how long, you can afford to keep your business’s money tied up.
Business Money Market Accounts
A business money market account is the business bank account you want if you have a lot of money saved, want higher interest rates than a business savings account or interest-bearing business checking account, yet still want some access to your money.
Here are the main features of a business money market account:
- Six withdrawals per month.
- Deposit money anytime.
- Deposit as much money as you like.
- Higher interest rates (currently between .1% and 1.6% APY)
- Require a minimum balance. Check with your bank to find out what those are.
- Penalties if you withdraw more than six times in a month. Ask your banker what the penalty is if you withdraw more than six times.
Why You Need a Business Bank Account
There are numerous reasons you must have a business bank account. The two most important business bank accounts you should possess are a business checking account and a business savings account.
Why You Need a Business Checking Account
At first glance, it doesn’t add up as to why a business checking account would cost more in fees than a personal checking account. There are reasons that make sense, though.
Here are the reasons why you need a business checking account:
- A business checking account is legally required if you own a limited liability company or corporation.
- A business bank account is an asset owned by the company. Should you ever decide to sell your business, a business bank account is transferable.
- It proves professionalism and helps build business credibility. You want your customers to make checks out to your business, not your person. A business checking account say’s, “This business is here to stay, it’s not going anywhere, and I can trust it to take care of me.”
- It keeps you from commingling your personal bank account expenses with business bank account expenses. Never mix personal expenses with business expenses. Do it, and you are likely to get audited by the Internal Revenue Service (IRS) or, if you live in Canada, the Canadian Revenue Agency (CRA). An IRS audit can be costly and time-consuming; for this reason alone, you should have a separate business checking account.
- It helps prevent piercing the corporate veil. Piercing the corporate veil is a legal situation where courts put aside limited liability protections, holding shareholders and directors responsible for both business debts and negligent actions. You must have a separate business checking account to help prevent this from happening should your business get sued for negligence or unpaid debts.
- It makes tax preparation less costly and less of a headache for you and your certified public accountant (CPA). Losing out on tax-deductible business expenses can cost your company a king’s ransom (well, hopefully not that much). But you also don’t want to get that call from your tax professional asking you 101 questions you don’t have answers to. That’s a headache!
- It protects your personal identity and avoids accounting errors. Though it may not be illegal for a sole proprietorship to operate out of a personal bank account, it doesn’t make good business sense. Prevent identity theft by opening a business checking account with your business’s Employer Identification Number (EIN) instead of your personal Social Security number.
- It allows you to accept credit card payments, Electronic Funds Transfers (EFTs), and Automated Clearing House (ACH) credit and debit transactions (e.g., direct deposit, payroll, and vendor credits). Consumers use credit cards religiously, and businesses cannot process credit cards through a personal bank account.
- It can integrate with business accounting software. Most mainstream accounting software works in unison with business checking accounts, making corporate accounting much more manageable and able to be processed in real-time.
- It proves the business is not a hobby. You have to show a profit on Federal Tax Form Schedule C for three out of five years; otherwise, the IRS considers your business a hobby, not a business. Show three years of business losses and expect to get audited.
- You must report expense deductions on a Schedule C (business tax report) if you operate a business as a sole proprietor. Better to just form a limited liability company (LLC) and open a business checking account.
Why You Need a Business Savings Account
Did you know that a business savings account can actually help you build business credit? It’s true. Besides saving money, this is perhaps the most important reason you need to open a business savings account. There are other reasons, though.
Reasons to open a business savings account:
- Build business credit. At some point, most businesses wisen up and take out a business loan to leverage other people’s money to make money. Learning how to build business credit is a process you should learn about as a business owner.
- Make saving money a habit. Embed this idea of saving money into your corporate culture. All successful companies do.
- Ensure access to capital in a time of need or crisis. Business savings accounts are liquid assets that can be accessed anytime.
- Save for tax time. Every business pays taxes; have the money accounted for and saved back in your business savings account. You should know the ins and outs of LLC taxes.
- Earn interest. A business savings account pays more in interest than a business checking account. If you keep a large amount of capital in your business bank accounts, better to keep it in a business savings account.
- Will not hurt your business. It never hurts to have money saved in a business savings account. It can only help your business, not hurt it.
How to Open a Business Checking Account
Opening a business checking is as simple as gathering some information together and completing an application. However, the thing to note is there are two ways to open a business bank account: online or in person. Some banks you have to apply for in person, while others offer the option of applying either online or in person. Some online banks require you to apply 100% online.
Here are the steps to open a business checking account:
- Do your due diligence. Know the fee structure and which bank is right for you. This means researching different banks and credit unions and discovering what each offers and coming up with the one that will work best for your business type. An easy way to do this research is to check out some of our business bank reviews.
- Get a tax ID number. You can get one free EIN from the IRS. If you think you already have one, here’s how to look up an EIN.
- Gather your business formation documents (for LLCs and Corporations).
- Gather your business license or business name filing paperwork.
- Call the bank and find out what other items you’ll need to open a business bank account. Every bank has different requirements, so make sure you check with them first before attempting to open a business bank account. Sometimes this information will be listed on the bank’s website.
- Go in person or online to complete all necessary paperwork and submit your business documents.
Once you’ve completed these steps, you will have a business bank account. At this time, you may want to order some business checks and sign-up for online banking, download the bank’s mobile app on your phone and be sure to add your bank’s business accounts phone number to your phone’s address book.
Important: We advise every business to open a business savings account to help build business credit and a money-saving habit. A business loan may be the last thing on your mind, but it is important to plan well in advance for a business loan. A business loan can help you grow your business faster by leveraging other people’s money. Business credit is another asset that increases the value of your business.
Expert Advice and Recommendations
Learning about business banking, how to get a business loan, and how to build business credit starts with expert advice and recommendations. Take this foundation and build upon it so you can build your business bigger and better.
Frequently Asked Questions
What’s the difference between a personal checking account vs. a business checking account?
A business checking account provides businesses with certain limited liability protections. A business checking account also provides benefits that a personal checking account does not provide (accept credit cards, payroll services, multiple signatures, business bank accounts are transferable if and when you sell the business).
How much money do I need to open a business checking account?
It depends on the bank and the specific business checking account type you open. Check with your bank to know exactly how much they require you to deposit to open a business checking account.
What do I need to open a business bank account?
There are some documents required by all banks. These include your tax ID number, business formation paperwork (we recommend that most businesses start an LLC), business license or business name filing paperwork, and a picture ID. Most banks have other requirements so we recommend calling the bank ahead of time to find out what other requirements they have.
Do I need revenue to open a business bank account?
No. You should have a business bank account first so that when you have revenue coming in, you have a safe place to store it.
Can I use my personal checking account for business if I'm a sole proprietor?
Legally you can, but we highly recommend you not do this. It is best to keep all personal and business expenses separated. Combining personal and business expenses can be far more expensive than opening a business checking account. Business checking accounts give you more transactions, greater transparency, saves you a lot of money when filing your business taxes, and cuts down on your chances of getting audited by the IRS. Don’t do it.
Can I use my personal checking account for business if I have an LLC or a corporation?
No. LLCs and corporations are legal business entities that require a separate business bank account. Aside from the legal standpoint, having a separate business checking account and a separate business savings account can add value to your business should you ever decide to sell it. These accounts are assets that are transferable with the sale of your business.
Are credit unions better for business accounts?
“It just depends,” is our answer. In many cases, credit unions are a better option for businesses as they tend to have lower fees and offer higher interest rates. Banks tend to make up for this, though, by often offering more rewards, free accounts, business credit cards, and additional services not offered by most credit unions.
Can you transfer money from a business account to a personal account?
Don’t do it. Mixing business and personal accounts is a surefire way to pierce the corporate veil, taking those limited liability protections you have with your LLC off the table in a court of law. Protect yourself, don’t mix your business checking account with your personal checking account.
Which bank is best for LLC?
It depends. You’ll need a bank that offers business checking accounts and business savings accounts. Match your business with the right bank. Pay attention to fees, interest rates, incentives, business credit card offers, and if the bank offers business loans.
Which bank is best to open a business account?
It is best to match your business type with the right business bank account. We highly recommend you read our expert reviews of the best business bank accounts.
Can I open a personal checking account for a small business?
We never advise businesses to open a personal checking account to do business banking. It is bad advice.
It is better to open a separate business bank account, rather than a personal account allocated for the purpose of doing business. Even if you never mix the two personal accounts, should you get sued for business negligence or unpaid business debts, you are likely to be held liable. This means the courts could seize your personal assets, like your home, car, retirement accounts, personal bank accounts, etc. Don’t risk it.
Do I need an EIN for my LLC?
All LLCs with employees, or any LLC with more than one member must have an EIN. This is required by the IRS. Learn why we recommend always getting an EIN and how to get one for free in our Do I Need an EIN for an LLC guide.