Many small business owners use a chunk (or all) of their personal funds to start their dream venture.
According to one source, 77% percent of small businesses finance their startup with personal funds. That means nearly three out of four business owners potentially have business and personal funds crossing paths.
If you fall into the majority, it might be in your company’s best interest to have a separate bank account for business.
You might be wondering, Do I need a separate bank account for my business? Read on to get all the answers to your burning questions about separating funds.
Are combined accounts legal?
Although it seems optional, separating funds isn’t always something businesses can opt out of. Some businesses must legally separate personal and business funds. If your company is a separate legal entity, you must separate your business and personal funds.
You need a bank account for business if you operate under a doing business as (DBA) name. A DBA name might also be called a trade name. A DBA name is a fictitious name that’s different than your business’s legal name (e.g., legal name Mark Smith/DBA Mark’s Mechanics). Many businesses tend to operate under a DBA name rather than their legal name.
If you operate as a limited liability company (LLC) or a corporation, you must open a separate business account.
Sole proprietorships and partnerships without DBAs are not legally required to open a business bank account. However, you may need to open a business bank account for certain business activities, like payroll or credit card processing.
You must open your small business bank account in person if you are in one of the following industries:
- Precious metals
Benefits of opening a business account
As a business owner, there are many benefits you can reap from opening a business bank account. Again, not every business is required to separate personal and business income. But if you want to keep your finances in tip-top shape, you need to consider separating your funds.
If you opt not to separate business and personal income, you might experience things like:
- Unorganized accounting records
- Inaccurate tax filings
- Missed growth opportunities
- Inaccurate financial information
To help avoid the above blunders, consider opening a business bank account. Separating your money can help you keep your accounting records organized as well as create a clear audit trail.
If you want to keep your books as accurate as possible, organizing your funds can help. Imagine mixing your personal and business transactions together and blowing your business budget. Sounds like a recipe for disaster, right? If you want to avoid this mess, keep your transactions separate. That way, you have clean and detailed records as well as matching invoices and receipts to back up your banking information.
Having mixed records can make things messy when it comes to IRS audits. Opening a separate account for business can help prevent any confusion with the IRS. To avoid an IRS nightmare and unnecessary stress, learn how to organize business receipts and your accounting books. If you do combine your business and personal transactions, make sure you keep a paper trail to prevent any issues.
Preparing to open a business bank account
Before you open a business bank account, you need to gather some information. Typically, you need paperwork to prove you’re a legitimate business.
Some information you might need to have and provide the bank with includes your:
- Social Security number (SSN)
- Employer Identification Number (EIN)
- Business license
- Business name
- DBA name
- Organizing documents (e.g., Articles of Organization)
Depending on your bank’s requirement, you might need to provide various pieces of information to establish a business bank account. Check with your bank to find out what their requirements are for opening a business bank account.
Establishing a business bank account
All banks require businesses to provide some sort of documentation when opening up a business account.
Documentation can also vary depending on your type of business structure. Check out what type of documents you need to provide, broken down by business structure.
- SSN or EIN
- Business license or business name filing document (e.g., DBA name)
- Partnership agreement
- Business name filing document (e.g., DBA form)
- SSN or EIN
- Articles of Organization
- Articles of Incorporation
If you haven’t already, determine which banking institution is best for your small business. Look at things like fees, requirements, and startup costs. Bank fees can vary, so be sure to do some research to find out which banking option will be the most cost-effective for your business.
If you already have a reliable banking institution, you can opt to open a business bank account with them. Or, if you don’t have a bank account or are searching for a cheaper banking alternative, you might decide to look into other banking institutions.
Steps for opening a business bank account
Opening a business bank account is a big step for your company. And, opening an account requires you to do research and follow a few steps. Before you run off and open an account, review the steps below.
Opening a business bank account steps:
- Select a banking institution
- Prepare your documents
- Open the account in person or online
- Double-check that your information is accurate
To make sure everything runs smoothly, make sure your business bank account lists the correct information (e.g., business name).
Consider tracking your funds to ensure they are coming in and going out of the correct accounts. Catching issues early on can prevent financial disasters in the future.
Looking for an easy way to track your business bank account’s transactions? Patriot’s accounting software lets you connect your bank or credit card to automatically import transactions. Or, you can manually record information using journal entries. The choice is yours! Get started with your self-guided demo today!
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This article has been updated from its original publication date of June 28, 2016.
This is not intended as legal advice; for more information, please click here.