It’s a question that every new business owner faces at some point. Maybe you’ve been running a small side business for a while and are ready to make it a formal business, or maybe you’re just starting out and don’t know when it’s a necessary step.
Learn about the benefits of having a business savings account and checking account, seven reasons you’ll need an account, the mistakes to avoid, what you’ll need, and how to choose the right account.
Benefits of having a business account
You might be wondering why a checking account or business savings account is different from your personal bank account and why you should bother setting up one. Especially if your business isn’t making a lot of money yet.
At first glance, you may see the additional fees associated with a business account and be tempted to defer that, but the advantages easily outweigh the disadvantages. Here are the advantages specific to professional accounts:
Business accounts protect the eligible account holder by providing personal liability protection by separating your personal and business funds. Merchant services also protect your customers’ personal information with additional security measures.
Your customers will feel more secure that they can make payments by card or check directly to your business rather than to you personally. Having a small business checking account also allows employees to handle banking tasks on behalf of the business.
When creating a business account, it comes with a business line of credit for emergencies or large purchases.
Most people don’t have the extra funds to start a business, which will allow you to get business credit cards that will help you start your business and increase your credit.
Seven reasons you need a business account
Now that you see the benefits of having one, let’s go over a few reasons why you’ll need it and how you’ll know it’s a good time.
Clean and accurate bookkeeping
You might not have a lot of transactions to separate personal and business transactions at first, but that number will increase as your business grows. Once tax season is over and you have a blank file to donate your account, you will be very grateful that you made this decision early on. Also, be sure to keep all receipts and invoices to give to your accountant.
Legitimize your business
Your fun hobby or sideline that grows beyond what you would have imagined may no longer be a sideline or hobby, but a legitimate business. You will now be able to do business write-offs and deductions and enjoy the benefits of owning a business. It’s also a way to stay in good standing with the IRS and other financial institutions to avoid audits.
Separate accounts are required for business and corporate loans
The IRS requires separate accounts if your business is incorporated, and yes that includes sole proprietorship and partnership. This sets the business apart from you personally, which is very important for many reasons. If your business is in need of loans, you will need a business account.
A clear audit trail for the IRS
No one likes to be audited and hopefully that won’t happen often. But it is likely that this will happen over the years that you are in business. Having a clear track of all expenses, invoices and receipts will make the process easier. Unorganized bookkeeping is a complete nightmare if you are selected for an audit.
This is huge in the eyes of those you do business with and it gives people security when exchanging money for services. This is also necessary to accept debit card and ACH transactions and to set up a point of sale system. When people see your business name on invoices and checks, it again underscores the legitimacy of your business. This is also great for the IRS.
To protect your personal identity
This is necessary as a business owner. At some point, you may have fraudulent activity, identity theft, or heaven forbid your business from going bankrupt. Separating your business from your personal information and personal finances will save you and your family from a disaster if it ever happens.
Build a business relationship with your bank
As your business grows, this will help you tremendously. Getting good credit, receiving loans for all major business expenses, and having credit cards for yourself or employees linked to your account will be of great benefit.
As you can see there are so many benefits, and to make this process easier, let’s also go over some mistakes to avoid.
Five mistakes to avoid when setting up your business account
There are a few common mistakes people make when opening a business account that create a headache later on, and we want to avoid that at all costs.
Incorrect or missing information during account setup
When making an appointment with your bank, ask what documents and information you will need to create your account. Coming to this meeting unprepared is where many business owners go wrong. Be careful not to use your Social Security number when creating your business account, but use your Federal Employer Identification Number (FDIC) instead.
Failing to plan for check signing powers
When setting up this part of your account, set it up with checks and balances in mind. If you have a business partner or allow staff to write checks, will the checks require multiple signatures or only multiple signatures once a certain dollar amount is reached?
Choosing the wrong bank
According to Seed research and studies, 63% of business owners choose the same bank for their business that they use for their personal account. Depending on which bank you use, this might not be a bad thing, but it’s best to do your research and find out which banks offer cash flow information and reports, transaction services, as well. than their minimum balance requirements and monthly fees. 40% of small business owners pay monthly maintenance fees or transaction fees and don’t take advantage of free commercial banking options. The $ 20- $ 25 a month service charge might seem low, but every dollar counts when you’re a small business owner.
Order the wrong checks
New business owners will order checks with their DBA (Doing Business As) or personal ID instead of their legal name, which will cause problems later. If your business accepts credit card payments online, it could lead to online banking fraud, and many merchant credit card processors require the legal name of the business to match a void check to ensure insurance. that they are identical. Many banks also offer electronic check printing compatible with online business accounting software, such as Quickbooks, as part of their offering.
Not maintaining the minimum monthly balance
Avoid paying unnecessary fees by maintaining a minimum daily amount in your account. To be on the safe side, try to keep a surplus above the minimum in the account
What you will need to set up your account
Make sure to check with the bank first, but here are a few things you will definitely need:
- Social Security Number if you are a Sole Proprietor or Employer Identification Number (EIN) if your business is a corporation, partnership, or limited liability company (LLC)
- Government-issued credentials, such as a driver’s license or passport
- Commercial license and articles of organization (for LLCs) or articles of incorporation (for companies)
- Organization of documents filed with the State
- Partnership agreement with the name of the company and its partners (for a company with several owners)
- Alias / Doing Business As (DBA) Certificate (if you operate your business under a name other than your legal name, for example, legal name Li Wei Zhang / DBA Zhang Consulting)
Choose the right business account
Business accounts have limits and benefits that serve and protect your business. Here are some things to consider when choosing an account for your business.
- Cash deposit limits: Many banks limit the amount of money you can deposit into your bank account each month and will charge you a cash handling fee if you exceed it. If your business needs to handle a lot of cash, find a bank with a high cash deposit limit.
- Transaction limits: Banks allow an average of 200 account balance transactions per month, including cash deposits, ATM deposits, and checks and electronic deposits or credits / debits.
- Fresh: No one wants to be blinded by hidden charges. You can avoid this by going over all the fees in advance to avoid paying extra.
- Bundled services: Some banks offer to waive their overdraft fees and charges if you sign up for their merchant services or business credit cards.
- Interest rate: Some accounts will pay you interest, but it’s worth doing the math to see if the interest is worth any of their charges.
Prepare your business for success
We hope this information will help you prepare for the success of your business. Starting a new business takes a lot of work, but with the right information and help along the way, it can certainly go smoothly and your business will thrive in no time.