Do I Need a Business Bank Account? Here Are 5 Reasons Why

[ad_1]

The post Do I Need a Business Bank Account? Here Are 5 Reasons Why appeared first on Millennial Money.

Opening a new business is mega-stressful. Especially if you’re going into business as a sole proprietor, you may be thinking: Do I really need a business bank account?

Business accounts are private accounts business owners use to keep their business finances separate from their personal finances. Usually, you’ll open one under your business’s name, rather than your personal name.

Keep reading to find out why you need a business bank account and how to open one.

5 Reasons to Open a Business Account

Whether you’re opening a store with a team of employees or plan to turn your side gig into a solopreneurial career, you need a business bank account. Not only will having a separate business bank account simplify your accounting, but it may even be legally necessary.

Here are five reasons why having a business bank account is imperative.

1. Organization

Believe it or not, your small operation could quickly snowball into a much larger one. When that happens, you’ll have additional expenses and income to keep track of.

If you’re growing a business and making many transactions, it’s critical to remain organized and efficient. Opening a bank account is a good way to keep your finances on track.

A business account will also come in handy if you decide to apply for funding or if you want to sell your business in the future. Lenders and buyers will want to see your bookkeeping before deciding to work with you.

2. Professionalism

Owning a business involves responsibility and professionalism. Customers and clients won’t take it seriously if you treat your enterprise as a hobby or side project.

Opening a business account can make your business look professional, leading to a stronger reputation and better relationships.

3. IRS regulations

The IRS mandates that incorporated businesses maintain separate accounts. This holds true for incorporated sole proprietors, corporations, and partnership agreements. So it may be necessary to open a bank account to maintain compliance with the IRS.

In addition, as a business owner, you face a higher risk of getting audited by the IRS. If this happens, having a business bank account can make preparing for the audit so much easier. You’ll always know where to gather the required documentation for all of your income and each business expense.

4. Protection

Businesses are targets for cybercrime and fraud. It’s also not uncommon for businesses to face legal issues.

For liability purposes, it’s important to shield your personal finances from the business as much as possible. This means avoiding using your personal bank account for business transactions.

By using dedicated business accounts, it’s possible to achieve greater security — preventing costly instances of fraud and abuse.

5. Payroll

If you have employees, you need to pay them — no ifs, ands, or buts about it. The easiest way to pay your employees is to open a business checking account and set up direct deposits directly into their personal bank accounts.

Of course, if you don’t want to overdraft on your account and get slammed with fees, you’ll always need to keep enough money in your account for payroll. It’s a good idea to maintain a healthy buffer in your business checking account at all times. How big a buffer you need depends on your cash flow and the size of your team.

Types of Business Banking Accounts

There are a few different types of business banking accounts. But for new business owners, the most important bank products we’ll discuss are checking accounts and savings accounts.

Business checking accounts

Business owners use their business checking account for everyday transactions such as paying bills and making purchases. They offer many of the features you’d expect from a personal checking account. For example, you can deposit and withdraw cash using a debit card, paper check, or ACH (bank-to-bank) transfer.

Many business checking accounts have monthly maintenance fees. But in most cases, your bank will waive your fees if you maintain a minimum balance.

Business savings accounts

Many business owners open business savings accounts to park cash they’re not going to use right away. Just like personal savings accounts, these business accounts earn interest, making them an ideal spot for your business’s tax-time and emergency funds.

The Federal Reserve used to limit savings account holders to only six transfers and withdrawals per calendar month or four-week statement cycle. But in April 2020, regulators removed that limit. Still, some banks have kept a limit in place.

Do I need a business checking account or a savings account?

Here’s the short answer: You need both.

Each type of business bank account has its own function. And both functions are necessary for the health of your business.

First, you’ll need a business checking account to handle all of your daily needs. You’ll use your business checking account to pay for everything you need for your business — from rent and marketing to merchandise and payroll and everything in between. Chances are, you’ll also use it to hold the money you make for the short term.

On the other hand, you’ll need a business savings account to earn interest on the money you’re not going to use right away. This makes it the perfect spot for an emergency fund you can tap into if disaster strikes.

In addition, having a savings account is a way to build business credit. (Yes, your business gets a credit score too.) Having money in your savings account shows future business lenders that you can repay them.

Plus, for solopreneurs, it’s also a great way to start saving for your retirement — if you ever decide to retire!

How to Open a Business Bank Account

Here is my step-by-step process to open a business bank account.

Shop around for the best bank rates
Get your paperwork ready
Fund your accounts
Set up your vendors and clients
Track and monitor your accounts

1. Shop around for the best bank rates

Don’t rush into working with any particular bank. There’s no reason why you must work with the same bank that maintains your personal accounts.

For a business checking account, look for banks offering the lowest — or, even better, no — fees, well-rated customer service, and perks that apply specifically to your business. And if you’re looking to open a savings account, look to the highest interest rates.

2. Get your paperwork ready

Most banks require several documents to register a new account. Here are some of the documents you’ll likely need. They’ll help you prove your business is a legal entity:

Your driver’s license (or another official form of personal identification)
Articles of incorporation
Articles of organization
Employer identification number (EIN)
Business license (if applicable)

You’ll also need to supply personal details such as your Social Security number, home address, and contact information.

3. Fund your accounts

Once your accounts are set up, it’s time to transfer money from your personal accounts or deposit checks made out to your business.

Make sure to keep careful records of your old bank accounts in case you need to provide documentation to a future buyer or the IRS.

4. Set up your vendors and clients

The next step is inputting any payees that you might have (e.g., clients or subcontractors). This way, you can seamlessly transfer money to them from your business account as needed. In most cases, you’ll be able to do this from your bank’s website or mobile app. You’ll also want to record your business checking account number and routing number so your clients can pay you via ACH.

5. Track and monitor your accounts

The last step is an important ongoing practice. Simply put, you absolutely must regularly track and monitor your accounts. It’s not a bad idea to check on your account balance every day. Not only will this give you more control over your business’ finances, but it will help you identify any suspicious transactions.

How to Choose the Best Business Bank Account

The criteria for choosing the best business bank account are pretty much the same as for selecting the best personal bank account. Here’s what to look for:

Low minimum requirements

Some business bank accounts require a minimum opening deposit. Many also require you to maintain a certain amount in your account at all times.

If you’re just starting out, this might be tricky to manage. Only a lucky few business owners have tons of revenue on day one.

Be honest with yourself and look for an account with requirements you’ll have no trouble meeting.

Low fees

A business checking account is more likely to have fees than a personal checking account. The most common fee is the dreaded monthly maintenance fee. This can be as high as $20 with some banks.

Luckily, some banks will waive maintenance fees if you maintain a certain balance in your account or make a certain number of deposits per month. Make sure you know what your bank’s policies are before opening an account.

High interest rates

Don’t be the only one hustling their butt off — put your money to work too! If you’re opening a business savings account, look for one that pays a decent interest rate. Your best bet might be with an online-only bank or credit union.

Frequently Asked Questions

Here are some of the most frequently asked questions about opening a business bank account.

Do I need a business checking account if I’m self-employed?

If you file your taxes as a sole proprietor, it’s not illegal to use your personal account. But as my favorite saying goes, just because you can doesn’t mean you should.

If you’re a solopreneur, having a business checking account will go a long way to making you look professional and keeping you organized. It will also come in handy if you ever decide to take out a business loan, sell your business, or — heaven forbid — get audited.

Can I use my personal bank account for my small business?

Any growing business — no matter how small — needs its own bank account.

Nearly every small business owner reaches a point where it’s necessary to open an official business bank account. Do this sooner rather than later to avoid messy complications.

Many entrepreneurs also find accounting software like Quickbooks or FreshBooks helpful for managing their finances.

Do I need to make money before I open a business bank account?

Nope. You don’t need to have made a cent before opening a business bank account. Ideally, it should be something you do before you even start selling a product or service.

How much should I save in my business savings account?

Here’s a rule of thumb: Try to save 10 percent of your profits in a business savings account. That’s a classic strategy that has worked well for both personal nest eggs and business savings accounts.

Should I get a business credit card too?

Getting a business credit card is a great way to pay for daily expenses while also collecting rewards. However, it requires careful planning. As with your personal credit account, you should never carry balances over into the next billing cycle.

Unpaid credit card debt could easily send your business into bankruptcy. It’s a top reason why small businesses fail.

The Bottom Line

Growing a business is not an easy task. There are a million different moving pieces to keep track of. So it’s a good move to have an easy way to manage your money.

Business accounts can come in handy when applying for small business loans or larger types of funding. They’ll also make tax time less of a headache.

Opening new business accounts seem like a pain at first, but it can save you a tremendous hassle down the line and position you for success.