Why a Business Bank Account Is Important

By
Leela Hopkins
VPM Staff
Updated
September 25, 2020

Opening a business bank account is one of the most important things you can do when starting a company. A business bank account plays a key role in growing your business, while protecting it and yourself at the same time. It allows you to keep track of business expenses, simplify tax reporting, and deposit payments under your company name. In this article, we outline crucial reasons for opening a business bank account and what you will need in order to do it.

When Should I Open a Business Bank Account

You should open a business bank account as soon as your business has an Employer Identification Number (EIN) or begins to accept or spend money.

The reason is the Internal Revenue Service (IRS) requires that any incorporated business have a business bank account. The rule applies whether the business is structured as a sole partnership, a partnership, limited liability company (LLC), or corporation.

A sole partnership isn't legally required to open a business bank account, but you should get one anyway. A business bank account is a pre-requisite for obtaining business loans. The reason is because lenders won't approve your business loans unless funds can be deposited into a business bank account.

Moreover, a business bank account is a must if you want to accept credit card payments for merchandise or services. If you have an ecommerce business, you'll need a business bank account to accept payments through your point-of-sale system.

Business Bank Account Advantages

A business bank account provides a simpler and more professional way to run your business. It makes it easier to manage your financials and protect your personal assets in case of a lawsuit.

Clean Financial Records

The main reason why it’s recommended to open a business bank account is that it alleviates problems that is caused by mixing your business and personal finances.

Opening a business account can help you separate business and personal expenses, allowing you to effectively track your business cash flow. You’ll also have a better way of managing budgets with a clear overview of your spending and expenses.

Through separating your personal and business bank accounts it will help you manage and organize what is necessary for taxes and deductions at year end. You will also have a clear audit trail.

Preserving Limited Liability

As a Limited Liability Company (LLC) opening a business bank account can protect the owner’s liability more effectively because they won’t be combining business and personal funds.

Since LLCs are separate legal entities from the individuals who own them, the owners can’t be held personally responsible for the debts that the company may accrue. However, there are some cases in which owners, members, or stakeholders are held personally liable for the company’s debts by the courts. This is referred to as “piercing the veil.” As a result, the owner’s personal assets, such as their home or personal investments, can be used to pay off the LLC’s debts.

One of the reasons why an LLC might have its veil pierced is for not adhering to corporate formalities, which include keeping detailed records of important decisions or holding annual meetings of stakeholders. It’s important for LLCs to strictly follow the rules surrounding the formation and governance of the company.

Small LLCs are especially vulnerable to having their veils pierced due to their size and corporate practices.

One of the mistakes that many small businesses make is “commingling assets,” by using business assets for personal needs or vice versa. This is strictly prohibited. For example, a small business owner might mistakenly use corporate assets to make an installment on a personal mortgage. So if you want to decrease the risk of putting your personal assets in jeopardy in the event of a lawsuit, then you need to adopt some protective legal measures. One of the most important things you can do is to keep your company’s bank account separate from your other accounts.

Saving Money

For tax purposes, you have to keep your personal and business income and expenses separate. Tracking business purchases and deposits in a separate bank account can help you manage budgets and financial transactions more easily when it comes time to file taxes. Just think about how chaotic your checkbook would be if you used it for both personal and business transactions throughout the year. This mess could prove costly when tax season rolls around.

Also, there are clear guidelines that differentiate a business from a hobby, and only businesses are allowed to deduct expenses. However, if you use a personal account to manage your business transactions, the government will consider your business to be a hobby. In case of an audit, this will inevitably become a difficult task when you have to look at every single transaction, no matter how small, to set personal apart from business.

Therefore, a separate bank account for your business will make it easier to show all your records to your accountant. Bear in mind that you have to file your business transactions in a different form from your personal tax information.

The Business Bank Requirements For Business Entities

Here’s a basic overview of what you’ll need to open a business bank account based on your business entity type.

Sole Proprietorships

Partnerships

Limited Liability Company (LLC)

Corporations

Applying for a Business Bank Account

If you have outstanding balances on credit cards, store cards, or overdraft, it’s best to clear these (if you can) at least three months before submitting an application to open your business bank account. This helps because typically banks are wary about lending to those who might be overexposed financially.

As a business owner you need to have a bank account that is perfectly suited to your LLC’s needs. With that in mind, we’ve included some other useful tips to consider when deciding to open a business bank account:

  • Open a checking account as your first account. This is a good way to start on the right foot and separate your personal and business finances.
  • Consider fee-free business bank accounts. If you don’t need to visit a bank for cash deposits use this to save money on account fees.

You should always shop around to make sure you find the lowest fees and the best benefits.

Here are some additional things to know and consider when choosing the right bank for your business.

Introductory Offers - Many banks provide introductory offers like free banking for a certain period of time.

Interest Rates for Lines of Credit - Some banks specialize in certain types of businesses and industries. Their custom offerings might better fit with your company’s needs specifically when it comes to interest rates for lines of credit.

Transaction Fees - Most business bank accounts charge transaction fees such as for depositing checks.

Early Termination Fees - These are associated fees when a party wants to end the agreement of the long term bank contract.

Minimum Account Balance Fees - Monthly fees can be waived if a minimum balance is maintained.

Finally, business bank accounts typically have more functionality compared to personal bank accounts. The following are the most important features that business bank accounts offer to business owners.

Protection - Business banking offers limited personal liability protection by keeping your business funds separate from your personal funds.

Professionalism - Customers will be able to pay you with credit cards and make checks out to your business instead of directly to you. Writing checks out of a personal account will harm your business image.

Preparedness - Business banking usually comes with the option of a line of credit and can be used in the event of an emergency for your business or for seasonal cash flow fluctuations or long cash flow cycles.

Purchasing Power - Credit card accounts can help your business make large purchases and help establish a credit history for your business. On the other hand, if you mix personal and business accounts, then your individual credit history can be affected. With a separate business bank account, you are building a separate credit history.

Open a Business Bank Account Now

When your business starts receiving and spending money, it’s time to open a business bank account.

A business bank account allows you to easily keep track of expenses, manage employee pay, convey finances to investors, receive and deposit payments, and plan your budget more accurately.

In short, a business bank account will greatly contribute to the success of your company. It is best to open your business bank account as part of the early formation of your LLC because it is a critical part of protecting your liability and managing your cash flow.

Do You Need a Physical Address to Open a Business Bank Account?

In order to open a business bank account you will need to have a real physical address.

VirtualPostMail gives its clients an efficient and simple way to attain a true physical address that complies with all the current regulations.

Learn how to get a physical address for a business bank account, while conserving your privacy and at significantly less cost than other renting options.