Why Every Small Business Should Open a Business Checking Account

As a small business owner, you want to do everything you can to legitimize your company. One way to appear as professional as possible is to open a business checking account. A company checking account allows you to function like a business and helps you keep your finances in good order for tax and business purposes.

You must open a business checking account to run a limited liability company (LLC) or corporation. Conducting business with these entity types is impossible if you use a personal checking account.

A business checking account isn’t required for sole proprietors. You can technically use your personal checking to manage your business finances. However, opening a business checking account can help you operate professionally and ensure that your personal and business finances stay separate.

No matter the type of company you run, there are several benefits to opening a business checking account.

Benefits of Business Checking Accounts

According to the Small Business Administration (SBA), a business checking account is necessary if you’re serious about professionally growing your business. Here are some reasons to open a company checking account for yours.

1. Separates Business and Personal Expenses

Mixing your business and personal expenses can get confusing. It’s much harder to track how much you’re spending on your business when you don’t separate your business transactions. This confusion can also interfere with your ability to track your company’s profit.

Separating business expenses from your personal bank account also helps avoid overspending. When you generate reports from a business checking account, you can see how well — or not so well — your company is doing. On the other end, keeping your business finances in a separate account can protect your company if you face any personal financial problems.

2. Makes Tax Reporting and Filing Easier

If you blend your business and personal expenses, you’ll have to untangle the numbers to calculate and record your deductible expenses at tax time. This process can take a great deal of time and effort. 

Instead, you could dedicate the hours you spend separating, recording, and invoicing your finances toward improving your business. 

3. Offers Liability Protection

You gain more personal liability protection with a business checking account because you can separate your personal funds. When you separate these transactions, you can help protect your personal assets.

Business banking accounts also offer access to merchant service providers that allow your company to accept customer payments via credit cards securely. This service gives your customers better protection by keeping their information safe.

4. Helps Owners Qualify for Business Loans and Lines of Credit

If you request additional funding for your business, the bank will want to see that you take running a company seriously. A business checking account shows lenders that you are a legitimate operation, making it more likely that the bank will approve your borrowing request. 

5. Allows for Credit Card Transactions

You must have a business merchant account to accept credit card payments. Since most legitimate companies accept credit cards nowadays, this can be a problem if you don’t.

6. Increases Professional Appearance

A business checking account helps you appear as a legitimate business and improves the overall optics for your company. Customers, vendors, suppliers, and lenders will be much more likely to take your business seriously when you have a company account and pay with company checks or business credit cards.

7. Provides Various Credit Options

Along with your business checking account, other credit options can make a business more successful. Most business banking accounts include access to credit lines and company credit cards. These options have the added advantage of helping you build a credit history for your company and boost your credit score.

When is the Best Time to Open a Business Bank Account?

Ideally, you want to open a separate business bank account before you open your business and start accepting payments or paying for goods and services. 

If you’re forming an LLC, you’ll usually open your business bank account once you file your paperwork. 

When running a sole proprietorship, you can wait to open a business bank account and use your personal accounts in the meantime. However, it’s usually best for your company and personal finances if you open this type of account when you start the business.

Types of Business Bank Accounts

There are several different kinds of business bank accounts, including traditional checking accounts for companies, business savings accounts, and what are known as money market accounts. Here are the details of each type.

Business Checking Account

Like a personal checking account, a business checking account allows you to handle all your day-to-day account receivable and account payable tasks. This includes depositing payments and making payments to suppliers, vendors, and employees, including yourself. With such an account, you generally get business checks and a debit card that allows you to withdraw and deposit funds at the bank and an ATM.

Some banks pay interest on checking accounts. If you maintain a high balance in your business checking account, choosing an account that pays interest is a good idea. Before applying for a business checking account, check bank interest rates for the highest-paying ones. The more you earn on your money, the better your business.

Additionally, while some banks charge a monthly fee for business checking accounts, others offer no fee or reduced fee accounts. Not having to pay fees will depend on if you have other accounts with the bank or if you’ll be depositing and maintaining a minimum balance.

Business Savings Account

If you’re opening a business checking account, it’s often a good idea to open a business savings account as well. This account allows you to set aside money for recurring expenses, such as quarterly tax payments and insurance. You can also use it to build an emergency fund for your company, as you never know when unexpected roadblocks will appear.

Some business savings accounts pay interest, so keep that in mind when looking for the best arrangement. You can also use the savings account to cover any amount taken out exceeding your current balance in your checking account. This practice can save you hefty over-the-limit fees.

Money Market Account

A business money market account is often a good choice when you have a significant amount of money in savings. Such an account, which is essentially a mix of checking and savings, pays much higher interest rates than a regular savings account. Because of this, money market accounts also have higher minimum deposits and monthly balance requirements than standard savings accounts. 

You can take the money out of a money market account whenever necessary. You’ll often get a debit card and checks for the account. The number of deposits you can make per month is unlimited, though there is a limit on how many withdrawals you can make monthly.

Features to Look for in a Business Checking Account

The best business checking accounts offer you and your company flexibility and protection for your money. Consider the following potential features when looking for a business checking account.

1. Account Fees and Requirements

Banks generally charge fees for their checking accounts. However, the bank may waive them if you keep a minimum daily balance. This helps prevent monthly maintenance fees and charges from eating into your business profits. 

Check if there are any potential fees before opening an account, including transaction fees for ATM withdrawals and deposits, and if there are ways to waive them.

Some accounts have transaction limits that could interfere with business operations. For instance, you may only be able to write a certain number of monthly checks, have minimum balance requirements, or there may be a limit on the amount of money you can transfer during one transaction. Considering all this information is essential before choosing a business checking account for your specific business needs.

2. Introductory Offers

Many banks want your business, so they’ll often offer introductory promotions to entice you to choose their institution. These promotions could be bonus cash for opening a business checking account, cash back offers, or lower fees for additional services, such as a safe deposit box. Note that bonus cash is generally taxed, so you may receive a 1099-INT at the end of the year.

3. Additional Services and Capabilities

Checking accounts often come with various services and perks. For example, many banks have mobile banking apps that allow you to make electronic deposits and check your balance and online banking activity. 

Checking accounts also allow you to get a debit card with your account or a credit card to open a credit line. You can also use the service to receive credit and debit card payments from customers.

4. Physical Bank Locations

Many banks offer online business checking accounts so you can manage your cash flow on the go, but they don’t have physical branch locations. Due to their reduced operating expenses, these banks often offer higher interest rates and lower fees. A tradeoff, however, is that you can’t visit a branch and talk to a banker in person. 

While many banks allow network ATM access where you don’t have to pay fees at specific machines, it’s essential to check if automatic tellers are nearby. There may also be ATM fees, but some banks offer reimbursement for out-of-network ATMs.

Also, remember that if you run a cash business with many cash transactions, you’ll likely need a brick-and-mortar bank location for cash deposits.

5. FDIC Insured Accounts

Congress created the Federal Deposit Insurance Corporation (FDIC) to help ensure that the nation’s banking institutions remain stable and that people’s money is secure in the event of bank failure. 

The FDIC is an independent agency that insures up to $250,000 per depositor, providing the bank is a member of the FDIC. For the financial safety of your company, check that the FDIC backs the bank where you’ll be opening a business checking account. If it isn’t, consider banking at another financial institution.

How a Business Checking Account Works

Business checking accounts allow you to take care of your day-to-day financial needs. Most checking accounts offer the following capabilities.

Check Writing

You can use company checks to pay business bills. After you order your checks, you’ll receive them with your company name and address. You can also use these checks to pay employees, including yourself.

Debit Card Payments

Business checking accounts generally come with a debit card, which allows you to make purchases for your business. You can also use the card at bank branches and ATMs to withdraw or deposit funds and to make monthly payments to vendors and service providers. 

If you have employees, you can often get debit cards for your staff to use for business expenses and set up spending limits. 

ACH Transfers 

ACH transfers are electronic, bank-to-bank money transfers processed through the Automated Clearing House (ACH) Network. An example is a transfer you make to your landlord to pay for the monthly lease of your office space. Such transactions are paperless, and most banks don’t charge for ACH transactions. You can make one-time ACH payments and recurring ones. 

Wire Transfers 

A wire transfer is generally the best way to go when you need to receive or send out a large sum of money. You can make wire transfers domestically or overseas. However, there are generally fees to send a wire transfer, and the costs are higher for international transfers.

What You Need to Open a Business Checking Account

Opening a business checking account takes a few steps, and you’ll need some documentation. Before applying, gather the following information:

Employer Identification Number (EIN) 

An EIN, or Federal Tax ID number, is used to identify a business entity and is issued by the IRS. This nine-digit number acts as your business’s social security number.

Most businesses require an EIN to conduct business. Sole proprietorships don’t need an EIN, but there are many reasons to get one. These include protection from identity theft, adding credibility to your company, and proving to clients that you are an independent contractor rather than an employee. The latter makes them more likely to hire you. An EIN will also enable you to establish business credit. 

To apply for an EIN, you must be the business’s owner or principal officer.

Business Founding Date 

This date is the day you officially made your business a reality.

Company Address 

You must give the bank your business address where you licensed the business. Sometimes, you can use a PO box, primarily if you work from home and prefer not to divulge your personal address.

Legal Business Name 

You need to provide your full legal business name for your company.

Contact Information 

This information includes your email address, phone number, and website URL.

Articles of Incorporation 

If you have formed an LLC or corporation, you’ll need to provide the articles of incorporation you filed with the state. The bank may also require your business partnership agreement if you have a partner, articles of organization if you’re running an LLC, or articles of incorporation if you have a corporation.

Business Licenses 

Bring any applicable business licenses to prove that you’re permitted to conduct business in your area. Check with your city, state, and county to determine what permissions you need for your industry.

Doing Business As (DBA) Certificate

Also referred to as a fictitious business name, a DBA allows you to conduct business under another business name without having to form a whole new organization. For instance, if you’re providing consulting services, you won’t be able to open a business banking account under your name, but you can under a DBA name, such as the name of your consulting company. 

Most banks will require a copy of your DBA certificate when you open a business checking account.

Identification Documents 

You’ll need to provide identification documents to prove you are who you say you are. These can include a government-issued picture ID, such as a driver’s license or passport.

Steps to Open a Business Checking Account

1. Determine the bank where you want to open the checking account.

2. Decide if you want to open the account online, in person, or over the phone.

3. Obtain the checking account application and complete it. If you go into a bank or call a branch, a banker will fill the forms out for you while you provide the necessary information and documentation. If you apply online, you’ll have to input the required information.

4. You must provide the necessary documentation and information while applying. Double-check your online application for accuracy. Any incorrect information will delay the processing of your application and may even cause a rejection.

5. You’ll usually need to make an initial deposit once you’ve filled out the paperwork for the account. There’s often a minimum deposit amount required. You can deposit with cash, check, or electronic transfer if you apply in person. You’ll need to pay by electronic transfer when opening online or on the phone.

6. While opening your business checking account, take the opportunity to also apply for additional accounts, such as a savings or money market account and a credit card or business line of credit. Doing this now prepares you for any future funding needs.

7. Set up overdraft protection and notifications if your checking account goes into the negative. This way, you can deal with a problem quickly before it becomes a much bigger issue and costs you late fees and penalties.

8. Close down old accounts, if necessary. If you’re switching accounts, make sure to close your old account.

Better to Apply Online or In Person?

Some banks don’t offer the opportunity to apply online for a business checking account to reduce identity theft risk. It’s more difficult when someone is applying virtually to determine if the business is legitimate.

If the bank allows you to apply online, keep in mind that it may take them a while to review your application and all your provided documents. This waiting period could range from 24 to 36 hours. If you apply in person, your application is usually approved that same day. Although it’s convenient to apply online, you may want to apply in person if you’re in a hurry to open your account and wish to speed up the process.

Opening a business checking account is a wise move that can protect your company’s finances and elevate the professionalism of your business.

Before applying for your business checking account, make sure to obtain an EIN. The reliable and experienced business professionals at Swyft Filings can make the process easier by assisting you to quickly and easily get your EIN.