When you launch your own business, one of the first things that you should do is establish its own business bank account.
If you form an LLC, you should make a separate bank account in the LLC’s name. In fact, establishing its own business bank account is a necessity, as the LLC is its own entity, separate from you personally. It must have its own bank account in which you can deposit money that your business earns. From this account, you can also withdraw funds to pay expenses. If your LLC doesn’t have a bank account, it won’t be viewed as legitimate by courts, so it won’t provide you, the owner, with the limited liability from business debts and lawsuits that you’d otherwise enjoy.
On the other hand, if you’re running your business as a sole proprietor, a separate bank account isn’t required by law or by the IRS. That’s because you personally own the business, so you could use your personal bank account for both personal and business income and expenses. Nevertheless, a separate bank account can provide some important benefits. With a separate bank account for your sole proprietorship, it will be much easier to keep track of business income and expenses, and the bank account will be helpful if you’re audited by the IRS. On top of that, it will help convince the IRS that you’re running a business, rather than merely engaging in a hobby. And it will help establish that you’re an independent contractor, not an employee.
Below is additional information on business bank accounts. Just keep in mind that, although we’ve made every effort to ensure that this information is accurate and up-to-date, it isn’t a substitute for legal advice, and it doesn’t constitute legal advice in any way. To get personalized legal advice, consult with an attorney.
Setting Up a Bank Account for Your LLC
Before you decide where to establish your LLC’s bank account, it’s a great idea to shop around, as banks want to attract businesses, so there are a lot of options that you can choose from.
Carefully consider what services you need, as well as how much you’re prepared to spend in monthly fees. Many banks will offer low-cost, or even free, accounts for small businesses with few transactions each month, but if you expect to have a high volume of transactions, you’ll probably have to get a more expensive business checking account. Just be sure to ask for a complete fee schedule from every bank you’re considering using so that you can compare fees and make the optimal decision.
You could also ask yourself the following questions as you compare plans so that you can find the one that will suit your needs best:
- Will you be able to maintain the required minimum balance in your account each month so that you can save on monthly fees or maybe even qualify for a free account?
- Do you want overdraft protection?
- Do you want a business credit card? Tip: ask if the bank will give you a preferred interest rate on a credit card that’s paired with a business checking account.
- Do you want to earn interest on your business checking account?
- Do you want to open a business savings account, as well as a checking account?
- Will the bank give you preferred rates on long-term loans or a line of credit?
- What online services are available?
Note: virtually every bank allows you to check your balance, pending transactions, and transfers for free. Many even allow you to pay bills online and transfer money between your accounts at no charge. Plus, you might even be able to make deposits with your smartphone and a mobile app. These are super convenient features that could help make it a lot easier to run your business efficiently.
- What extras are available with your account? These might include sending invoices or receiving help with collecting payments.
After deciding which bank you want to use, it’s time to open your business bank account by providing the proper documentation. If you’re running an SMLLC, you’ll need a copy of your filed articles of organization. Many banks will also require that you obtain an employer identification number (EIN) from the IRS before establishing a bank account in your LLC’s name, even if your SMLLC is taxed as a sole proprietorship and the IRS doesn’t require you to obtain an EIN. But, because some banks don’t require an EIN, you might find a bank that will gladly accept your Social Security number to get your account open.
Also, if you use a name other than your LLC’s formal legal name to identify your business to the public (also known as an assumed name or a dba, “doing business as”), you’ll need to provide a copy of the fictitious business name statement that you filed in the county where your office is located. Doing so will allow you to obtain an account in your business’s assumed name. Alternatively, the bank might accept a copy of a business license in your business’s assumed name.
Setting Up a Bank Account for a Sole Proprietorship
Are you operating as a sole proprietor doing business under your own name? Then you should consider opening up a second individual bank account in your name and using that account solely for business purposes.
A great perk is that you’ll often pay less for a personal account than a business account. Unfortunately, though, you won’t get any of the extra services that banks typically provide to business customers. Also, if you have a lot of monthly transactions, your bank might even insist that you open a business account instead.
In order to open up your bank account as a sole proprietor, simply provide your Social Security number and a photo ID. If your account is in your personal name, that should be all that you need to provide. Easy peasy!
But if you use a name other than your personal name to identify your business to the public, you’ll need to provide a copy of the fictitious business name statement that you filed in the county where your office is located in order to get an account in that name. Please note that your bank might also accept your business license showing your assumed name.
Why is it important to take these steps? Consider this example: if your business’s legal name is John Smith, and your assumed business name is AAA Consulting, you can open a bank account in the name AAA Consulting by giving the bank a copy of your filed fictitious business name statement. This will enable John to deposit client checks that are made out to AAA Consulting. Makes sense, right?
When your business is a sole proprietorship or SMLLC that’s taxed as a sole proprietorship, you should pay yourself simply by writing a business check to yourself and then depositing that money into your personal account.
Alternatively, you can set up periodic electronic bank transfers between your business and personal accounts. This is referred to as an “owner’s draw” or a “personal draw.” Just be sure to stick with using your personal account to pay for non-business and personal expenses.
Note: personal draws aren’t deductible business expenses, so they shouldn’t be listed as such on your Schedule C. You don’t need to report personal draws to the IRS, but you should keep track of them, as well as keep them separate from the total net self-employment income that you report on Schedule C. You’ll pay taxes on net self-employment income, which is your total business income minus business expenses that don’t include draws.
Every business expense should be paid through your business checking account so that you’ll have a single account showing all of the money that you spent on your business in a year.
You can do this by using checks drawn from your business account, or by using a debit card that’s linked to your business checking account. You could even do so by making electronic fund transfers from your account.
Tip: If you end up paying with a traditional paper check but it isn’t clear from the name of the payee what the check is for, be sure to describe the business reason for the check, such as equipment or a service you purchased.
Remember — you don’t have to pay all of your expenses by check or by electronic funds transfer. Instead, you can use electronic payment services like debit cards, credit cards, and PayPal. These are all really convenient and totally fine, but you should fund these payments from your business checking account. In other words, you should pay your business credit card bill every month with money from your business checking account, and PayPal payments should be funded from that account as well.
Need Help Setting Up Your Business Bank Account?
As you can see, it’s very important, as well as extremely convenient, to have an official business bank account in place when you’re running your own business. But if you’re at all confused by the process or you simply don’t have the time to dedicate to researching options and opening an account, Hyke can help. We’re here to help you at every step, from forming your business and opening up a business bank account, to maintaining your business for years to come. Join us today to learn more, and to start taking advantage of the perks that come with opening a business bank account.
Stephen has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.