Many new business owners often wonder what things they will need to successfully execute their business plan. The truth is, it requires a lot of planning, resources, and help to make a business into a reality. But there is one very important aspect of running a business that may seem obvious, but some first-time business owners don’t consider – and that’s opening a business bank account.
A bank account for your business will enable you to make purchases, write checks, deposit money, and a whole assortment of basic financial tasks that any business needs to get off the ground. But setting up a business account isn’t necessarily the most straightforward process in the world, depending on what your business is and what type of account it will need. So if you’re looking for advice on how to open a business bank account, this article will provide a few important details to keep in mind as you begin.
As you’ll see, there are a variety of different business accounts, some of which may be bank accounts and some of which keep track of revenue and other expenses. Depending on the size of your business, it may make sense to have everything consolidated into one simple bank account, but for larger business or certain types of companies, things may be spread out over numerous different accounts. It can get a bit complicated, but hopefully, the information contained here will help get you started if you’re a business owner curious about what it takes to manage business bank accounts.
What is a business bank account?
A business bank account is similar to any other bank account. It is a place where you can store your business’s funds, to be used how you need. Of course, a business bank account is different from a personal bank account for a number of reasons. And there are a few different types of bank accounts for businesses, such as checking accounts, savings accounts, payroll accounts, and business tax accounts. But many of these accounts follow similar procedures for getting them set up, so it’s important to know what you’re getting into. Regardless of what you may plan on using your business bank account for, there are a number of reasons why you should consider opening one for your business.
Why do I need a business bank account?
It can be tricky to mingle personal finances with business finances. There are several reasons why this might be a bad idea.
- For one, it can make doing your taxes much more difficult, as you’ll need to keep track of personal earnings and expenses as well as business earnings and expenses.
- And you’ll be forced to do this on your own if your personal bank account is doubling as your business bank account.
- Generally, it’s much easier to keep track of business income and expenses if these transactions are separate from your own personal finances.
How to get a business bank account
There are a few steps you’ll need to complete if you want to successfully get a business bank account. First, you’ll need to choose a bank. This might be one of the most important steps in the entire process. Different banks offer different terms for their accounts, including different monthly fees and other various charges for certain transactions and other activities.
You’ll want to consider what you plan to do with your business bank account, what type of business bank account you really want, and how often you may perform certain transactions. You don’t want to sign up for an account that has numerous fees for activities you’ll be performing regularly. And you want to pick an account that has perks which will actually benefit your business. Keeping your business plan and business type in mind when you select a bank with which to form your account is crucial. The most important thing is to do your own research.
Another important preliminary step you can take to make the process of getting a business bank account go more smoothly and easily is to prepare your documents ahead of time. As with selecting the right bank, the type of documents you’ll need will depend on your business structure. But some materials are constant for virtually all businesses. For example, you’ll need:
- A taxpayer ID number. This number is similar to a Social Security number, but for businesses. Sometimes it is referred to as an EID or Employer Identification Number.
- A business name filing document or articles of incorporation or organization. Again, it all depends on what type of business you have, so make sure to look up the specifics before you begin the process of requesting a business bank account.
If your business qualifies for an account at the bank you choose, then you’ll need to go ahead and open the account. This may be able to be done online or in person, depending on the bank and the specific account. Some industries may not be able to open a business bank account online. Some of these industries include telemarketing, gambling, government businesses, or precious metals.
What are the different types of business bank accounts?
There are a variety of different accounts that a business may need to open to operate the most efficiently. Again, it all depends on the type of business, the size of the operation, and what your business plans to do in the future. Are you hoping to maintain your current levels or are you aiming for growth? Is your company 5 employees or 500? These questions and many more are essential to selecting the right account or accounts for your business needs. Not all of these accounts require a bank to be set up, some of them are accounts that businesses manage for themselves, in order to keep better track of finances and where the money is coming and going.
Expense accounts are one such account that can help a business keep track of services or products that don’t have a resale value (as opposed to assets, which can be resold if needed.) Keeping a well-maintained expense account can make tax season and end-of-year projections easier. However, it’s important to note that different countries have different rules and guidelines regarding expense accounts, so it’s wise to consult a financial advisor or accountant for specific instructions on how to properly set one up for your business.
As mentioned earlier, an asset account keeps track of the value of assets owned by a business. These “assets” have some sort of resale value, although they often depreciate over time. Assets may include vehicles or buildings owned by a business, office equipment, or other physical items that a business owns.
If your business sells a physical product, you may have a “cost of goods sold” account, which tracks the cost of producing the product itself. This is useful for determining the price for which a business should sell their product. Obviously, a business needs to turn a profit to thrive, so knowing exactly how much cost goes into each unit of your product is essential for maintaining a fruitful operation. A cost of goods sold account can help business owners keep track of this, and potentially cut costs if the opportunity presents itself.
An equity account keeps track of the value that has been added to the company through investments or other means. Some ways that equity could be built for business include rolling over earnings from previous years, but the most common form is probably outside investments.
Accounts payable and receivable are two sides of a similar coin. Accounts receivable is the record of invoices that haven’t been paid to your business yet. Essentially, it represents the money that a business is owed, but hasn’t been paid yet. On the flip side, accounts payable is the bills that a business owes but hasn’t paid. Some best practices for properly maintaining accounts payable include keeping track of due dates, so you make sure to issue the money on time and maintain your business’s good reputation.
Liability accounts keep track of the active debt your business has accrued. Although “debt” may sound like a dirty word, it’s not uncommon for businesses to have liability, especially new businesses. If you’ve taken out a short-term loan for new equipment, or a line of credit, for example, that would be an example of a liability. It’s important for any business to keep track of the liabilities they’ve incurred, so they can make the proper plans to pay back any debts and factor them into their profitability calculations.
As you can see, setting up a business bank account can be simple or complex, depending on the size of your business and your accounting needs. If you have multiple payments coming in and out regularly every day, your business may need to have multiple different accounts set up to keep track of everything. But if you’re a new business or a startup that’s just getting off the ground, starting with a simple business checking account may be enough to cover your initial needs. It all depends on the individual circumstances driving your business. Plus, there are different rules, benefits, and guidelines for virtually every different type of company.
- Publicly traded companies
- Family-owned operations
These may all have different laws or requirements, so it’s important to do the requisite research into what types of accounts you may need to set up. Of course, we advise talking with a financial advisor or accountant about your business’s specific situation. Because every company is different, every business bank account situation may be different as well. If you put the right level of thought and care into the process, you can make sure your business is set up to succeed.
Disclaimer: This is not legal or financial advice. Please consult a legal or financial advisor for your specific situation.