A business savings account is critical for long-term business growth and maintenance. Just like a personal savings account, a business savings account allows entrepreneurs to manage cash flow and build savings for unforeseen expenses and fees.
Let's go over the benefits of having a dedicated business savings account, the drawbacks of mingling your personal and business finances, and tips on selecting a small business savings account that’s right for your business.
Why You Should Have a Small Business Savings Account
Here are a few reasons why opening a business savings account is a good financial practice that will help you optimize your finances, deal with emergencies, and expand your business:
Keep Business and Personal Finances Separate
What happens when you use your personal savings account instead of a business savings account? This is a common accounting mistake small business owners make, and it can lead to a few problems.
A separate business savings account creates a clean paper trail and protects your personal assets if a lawsuit is filed. For instance, if you’re using your personal savings account for business renovations and a lawsuit is filed against your business, your personal savings could be up for grabs. Lawyers could argue that you and your business are the same because all funds are coming from a single account.
Think you won't be sued anytime soon? Well, what about an audit? A dedicated small business savings account also reduces the risks of making mistakes during tax time. Suppose there's no distinction between your personal and business funds. You could end up claiming a tax deduction that doesn’t apply, triggering the IRS (Internal Revenue Service) or state tax department to penalize your business.
Many business owners also say that keeping a separate business savings account prevents them from dipping into their own reserves, making it easier to save for big expenses like renovations or well-deserved vacations.
Fund Startup Costs and Major Purchases
An increasing number of small businesses are struggling to access capital through small business loans and credit lines, as 65% of banks and the SBA have tightened their lending. Access to cash in the early stages of business formation can mean the difference between a thriving business and permanently closed shutters.
A business savings account allows you to build capital to fund your business and make those necessary large-ticketed purchases to keep it going.
What exactly should you be saving for? Here are some common startup costs for small businesses:
- Legal entity registration costs
- Market research and analysis
- Technological investments
- Licenses and permits
- Office supplies
A business savings account can also be tapped into for unforeseen expenses:
- Necessary office space upgrades or building maintenance
- Damaged or lost inventory
- Delayed payments from key clients
- Investment in new equipment
- Workplace accidents
Build Cushion for Economic Downturns and Emergencies
Economists claim to know how the economy will ebb and flow, but changes can still be unpredictable. Plus, local and global emergencies have proven to be an unexpected blow to businesses worldwide.
Invest in the right accounting software to get in the habit of depositing money into your savings account every month. That way, no matter how conditions look, you’ll have sufficient reserves to tap into to keep your business afloat without borrowing money, undertaking extreme cost-cutting measures, or shutting shop.
Expand When the Market Calls for It
A small business savings account gets you into the habit of collecting money that can be used to invest in your business’s expansion. You can take advantage of growth opportunities and scale your business without having to take out loans or pay hefty interest rate fees, thus maximizing your profits.
Robust savings can also help you expand by hiring top talent, acquiring better product knowledge or intellectual property (IP), or creating a website. With these things in place, you are better positioned to be an industry pioneer and push boundaries, even when you end up growing faster than planned.
Pay Business Taxes
When running a business, be careful not to neglect future expenses like taxes. A business savings account allows you to hold funds for any applicable quarterly or annual tax payments or unforeseen fines and penalties.
Secure Loans and External Funding
You can improve your prospects of getting business loans and credit lines with a business savings account. Lending institutions and investors thoroughly review bank statements before deciding to finance a small business. Having a healthy amount of money in your business savings account improves your financial history and credit score and shows lenders and credit line providers that you are capable of paying the money back.
Secure Business Earnings
Bank theft is on the rise, but you can protect your earnings through a business savings account. Business savings accounts are covered by the Federal Deposit Insurance Corporation (FDIC), and the FDIC guarantees repayment of up to $250,000 if a bank is unable to return your money due to closure.
Protect From Overdraft Fees
When you set your business savings account up with the same bank as your checking account, you can save yourself from overdraft payments. If you accidentally overdraw from your checking account, a predetermined amount will be transferred from your savings account to your checking account.
What to Look for When Selecting a Bank
Be wise when choosing a bank to open your business savings account.
In addition to looking at annual percentage yield (APY), which refers to how much interest you can earn on your savings, consider the following factors while you’re evaluating banks or credit unions:
- Minimum account balance: What's the minimum that needs to be in the savings account? Is there a minimum deposit to open a business savings account?
- Monthly account maintenance fee: Are there any reoccurring charges for having a business savings account?
- Withdrawal terms: How often can you withdraw money? Do you lose interest if you withdraw before a certain time?
- Overdraft fee: If you accidentally overdraw, what is the fee? Is it a fixed or variable amount?
- Wire transfer fee: In case you do need to make a wire transfer for large expenses, what is the fee per transfer? Who bears the fee — you or the receiving party?
- Account inactivity fee: Are there any penalties if the account is dormant and no money is being deposited? What's the time period before inactivity fees kick in?
- Experience working with small business owners: Banks that have experience working with small business owners might be better prepared to anticipate and manage your needs.
Top 4 Business Savings Accounts
Here are our top picks for banks and credit unions that offer the most competitive interest rates and fees for business savings accounts:
- Live Oak Bank Business Savings Account
- Capital One Business Savings Account
- TAB Bank Business Savings
- Axos Bank Premium Savings Account
FAQs About Small Business Savings Accounts
Still not sure about opening a business savings account? Check out these frequently asked questions from other small business owners like you.
Can I Use a Regular Savings Account for My Business?
To avoid confusion and create a strong separation of identity between your business and personal life, it’s best to open a dedicated small business savings account and not use your regular savings account.
Do You Pay Taxes on Business Savings Accounts?
Yes, the IRS requires you to report and pay taxes on any interest you earn from a business savings account or credit union. This doesn't apply if you have a tax-deferred account like an IRA (Individual Retirement Account). You will receive a Form 1099-INT from each financial institution you have a savings account with that will show the interest earned.
The interest is taxed at the same rate as your earned income. You don’t pay taxes on the savings account balance. So, if you earned $30 dollar as interest this past year and your account balance is $10,000, you’ll be taxed for the $30.
How Much Money Should a Small Business Have in a Savings Account?
Every business uses a savings account differently, and the amount you put in varies based on industry type, stage of business, and business goals. Some experts suggest putting 10% of monthly profits, while others recommend having at least three to six months of expenses accumulated as a cushion.
A business accounting software or bookkeeping service can help you identify monthly expenses, giving you a rough estimate of how much you have saved at any given time.
Should My LLC Have a Savings Account?
Yes, your LLC (Limited Liability Company) or corporation should have its own savings account. Why? LLCs and corporations are separate business entities, and one of their greatest benefits is liability protection. However, your personal assets can only be protected from business lawsuits and bankruptcy when there is a clear distinction between business and personal funds.
Do I Need an EIN to Open a Business Savings Account?
This depends on the bank’s policies. Most banks do require a business tax ID or EIN (Employer Identification Number) to open a business-specific bank account. Therefore, we recommend getting an EIN sooner rather than later as it not only speeds up opening a bank account but also helps you access loans and build business credibility.
Form Your LLC and Open a Business Savings Account
It takes money to make money, and a small business savings account is the smart way to grow and protect your business. However, you can only open a dedicated business savings account after you have legally formed your business.
Register your business as an LLC or corporation to obtain an EIN, open a business savings account, and keep your personal assets protected. At Incfile, we've supported over 1 million small business owners in securing their business and financial goals with our $0 LLC formation package. All you pay is your state fee.