When starting a new business, many entrepreneurs ask themselves the same question: "Do I need to set up my business as a Limited Liability Company (LLC) to open a business bank account?"
There are several benefits to operating a business as an LLC, including limited liability, pass-through taxation, etc. In this guide, we'll discuss the advantages of establishing an LLC, but we'll also explain how it can affect your banking options. Whether or not you need an LLC to open a business bank account depends on several factors.
The Importance Of A Business Bank Account For An LLC
While not legally required, having a separate LLC bank account can be a smart move. For one, it keeps your personal and business finances separate and opens doors to other potential benefits.
Benefits Of Separating Personal And Business Finances
It's a good idea not to mix your personal and business banking transactions. Keeping them separate will help you avoid headaches at tax time and potential legal troubles further down the road. Having a dedicated LLC bank account makes tracking expenses easier, simplifies bookkeeping, and helps with accurate tax calculations, potentially lowering your overall tax bills.
How An LLC Can Improve Borrowing Terms
Banks often offer better lending terms to well-run companies because they see them as less risky. By having a dedicated LLC business bank account, you may qualify for more favorable interest rates on loans or credit lines for your LLC. Plus, regular business deposits shows you're a reliable and trustworthy entrepreneur, increasing your chances of securing additional funding when needed.
Opening A Business Bank Account As An LLC
You need certain documents to open a business bank account of any type. For LLCs, you'll need your company's Articles of Incorporation, and your Employer Identification Number (EIN). Here's a closer look at both documents.
Understanding Articles of Incorporation
Articles of Incorporation are legal documents filed with the government when a corporation is formed. Included in the Articles is important information about the business, like the company name and address, the ownership structure, and the amount and type of shares issued.
Importance of Employer Identification Number (EIN)
An EIN is like a social security number for businesses. It's the IRS's way of keeping track of the business. It also helps you keep your personal and business finances separate, so you don't accidentally buy a yacht with your LLC's money.
In addition to the Articles of Incorporation and EIN, banks might require further documents when opening an account. So be prepared to provide ownership stakes, lease agreements, and whatever else they request.
Remember, each bank has its own requirements, so check with them directly. Gaining the proper legal footing in advance can make things easier.
Choosing A Business Bank Account
When it comes to managing your LLC's finances, choosing the right business bank account is important. Most business banks offer dedicated services that make it easier to operate your business. Perhaps your first decision will be whether to open a business checking or savings account.
Pros & Cons Of Business Checking Accounts
A business checking account is meant for everyday use. It lets you deposit and withdraw funds with ease. Benefits include the ability to conduct a large number of transaction for a reasonable fee, set up direct deposits and manage payments, and access to online banking.
- Pros: Easy access to funds, online banking, unlimited transactions.
- Cons: Possible monthly fees or minimum balance requirements, low interest rates.
Advantages Of Business Savings Accounts
Unlike checking accounts, business savings accounts are not meant for frequent transactions. However, they do offer higher interest rates, allowing your money can grow over time, with no risk to your principal. And most savings account don't charge a monthly fee.
Your choice will come down to the needs of your LLC. Many business owner's will decide to operate both types of accounts.
Opening a Business Bank Account
If it's your first business, opening a business account may seem intimidating, but the process is fairly straightforward. That said, many banks require additional documentation beyond the documents we mentioned earlier: the Articles of Incorporation and EIN.
The Role of a 'Signee' in Company Banking Matters
A signee is the person who manages the company's financial transactions. It could be you or someone else you trust within your LLC. The signee will need to provide personal information for identity verification.
Documents Required by Banks
- Employer Identification Number (EIN): This unique nine-digit number, assigned by the IRS, identifies businesses in the United States. You can apply for an EIN online on the IRS website.
- Personal Identification: Banks may also require personal identification, such as a driver's license or passport, from each LLC member.
- Articles of Incorporation: This legal agreement outlines how your LLC will be run, including ownership stakes and voting rights.
Producing the right paperwork on time is crucial to avoid delays in setting up your account and other startup-related issues, allowing you to focus on growing your business rather than administrative tasks.
How Business Bank Accounts Can Help With Long-Term Growth
There are more costs associated with operating a business account as an LLC versus remaining a sole proprietor. You also have to spend more time setting up the business and keeping your paperwork in order. But doing so can help your business grow.
Projects a Professional Image
Business bank accounts keep your finances in check and help you appear more professional to your customers, suppliers, and lenders.
Separating personal and business expenses makes bookkeeping a piece of cake. No more headaches during tax season - just clear deductions and easy filing. .
Helps You Build Credit
A dedicated LLC bank account can boost your LLC's credit history. And good credit means better borrowing terms for future expansion plans.
Try not to worry about the extra work of setting up a separate business bank account. The long-term benefits are worth it. Focus on managing your money, gaining trust, simplifying taxes, and securing better borrowing terms.
You don't need to operate as an LLC to open a business account, but depending on the nature of the business, ownership structure, and tax considerations, it might make sense to set up an LLC. If you're unsure, consult with a lawyer, accountant or a business banking specialist, to get their professional opinion.
What documents do I need to open a business bank account?
For an LLC bank account, you will need to have Articles of Incorporation, and EIC, and personal identification for anyone signing on the account. You bank may have other documentation requirements.
Can I use a personal bank account for my business?
Technically, sole proprietors can use their personal checking account for business transactions, but it's not recommended. However, an LLC is a separate legal entity apart from the owner, so it needs its own business bank account.
How do I open a bank account with my business name?
You can open an account under your company's name by providing necessary documentation like EIN number and Articles of Incorporation at your chosen banking institution.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared toward anyone wanting to earn more, get out of debt, and start building wealth for the future.