One of the first questions that should be top of mind for entrepreneurs starting a business is how to open a business bank account. Getting your own business bank account is a valuable step in making your company “real” as a legitimate legal entity — it makes it easier for you to pay bills, separate your business finances from your personal finances, keep track of business expenses and potentially save money at tax time. But most essential of all, having your own business bank account makes it easier for you to get paid by your customers!
However, there are a few potential risks and downsides you’ll need to navigate. Make sure to avoid these common mistakes in opening a business banking account:
1. Trying to Open a Business Bank Account Without an LLC or Business Entity
You cannot open a business bank account until you have gone through the process of forming an LLC (or other corporate entity) and getting an Employer ID Number (EIN) for tax purposes. Without a legal business entity that is separate from your personal identity as an individual, you cannot open a business bank account.
If you don’t have an LLC or other corporate entity for your business operations, you can do business with a personal bank account by operating as a sole proprietor — but this is risky. By intermingling your personal funds with business funds, you are forgoing the tax advantages of deductible business expenses and risking your personal assets in the event of any legal trouble. Having a business bank account is a simple way to show that you are open for business, you’re a legitimate business owner and that you are following the rules and doing business the right way — without taking shortcuts or avoiding safeguards.
2. Forgetting to Bring Required Documents
Just like you need to show identification when opening a new personal bank account, banks usually require one or more documents to help identify your business as a new customer and open the new bank account in your business name. Here are a few of the key documents you might need to provide when opening a business bank account:
- Employer Identification Number (EIN)
- Business formation documents (such as Articles of Incorporation)
- Ownership agreements (especially if you have business partners)
- Business license (if applicable depending on your state/city/industry)
3. Getting a Bank Account With the Wrong Features and Services
There are a variety of business bank account packages out there depending on which bank or credit union you choose. Make sure you get the right assortment of account features and services that are most important to you. For example, a typical small business owner who is a single member of an LLC might want to have a business checking account, a business savings account (to save money for taxes), and a business credit card.
See if there are any special offers to avoid fees, save money, or get special deals or terms for your business banking. Many banks want to win your business, and they might offer package deals if you agree to open more accounts or get more banking products with them.
However, make sure you don’t sign up for too little or too much:
- Don’t get an online-only bank account if you need to deposit cash
- Don’t sign up for a business line of credit if you’re still too small to need it
- Don’t sign up for an expensive merchant services account (to process credit card payments) if you can get by with lower-cost payment processing options like Square or PayPal
The bottom line is to make sure that your business banking services are right-sized for the business you have now; you can always add more options later as you grow.
4. Choosing a Bank for the Short-Term Only
Choosing a bank for your business account should be approached as a long-term partnership. Don’t assume that you will switch banks — be ready to stay with your bank for the long haul. The better you can communicate with your bank and the longer you stay with them, the more discounts, value-added services and special features they can offer you.
Business bankers will ideally want to work with you for the long-term, and they’ll be happy to consult with you along the way about how they can help your business with the right selection of loans or banking services. There are a lot of complex business services that banks can provide which might not be the right fit for you today, but will become helpful as your business grows.
Opening your business bank account is one of the most exciting steps in starting a new business. It lets you create a separate financial identity for your business apart from your personal finances, it helps you get paid more efficiently and it can hopefully help you create a more abundant future for your business and your personal life. Treat your business bank account like a long-term investment and a serious partnership: if you have a good relationship with your bank, they will be more likely and willing to help take care of you for many years to come.
Are you ready to start a business, form an LLC, or reorganize your business structure to get serious about operating as a “real” legal business entity? Talk to Incfile today! Our incorporation experts can help you evaluate your options and get on the right track for a brighter financial future.