Before you can ever open your doors or website to conduct business, you will need to get your financial house in order. Having the cash on hand to pay the bills is one thing, but actually having accounts to put that money in is quite another.
Opening a business account is not as easy as opening a personal account. Banks must open business accounts following certain rules and regulations to ensure no one is using the account as a front for illegal activity.
The first thing your bank will require is for you to have registered your business with the state and the federal internal revenue service (IRS). If you are working as sole proprietor, you will need to obtain a business identification number. Like a social security number this ID will be used to keep track of the income your business generates and the taxes it pays as long as it remains a viable business.
If you are running a very small business, you may be able to use your social security number as your business ID but check with your bank or a lawyer to see if this is possible.
For those who decide to incorporate their business using either an LLC or some other entity, a special number will be issued and this number must be used when opening any business accounts. Unlike an unincorporated business, checks deposited into the account must be made payable to the business name only. Personal checks must be cashed separately and the cash deposited into the business account. Accounts for non-incorporated businesses do not have to follow this same rule.
Once you have registered your business and obtained the proper ID numbers, it is time to meet with a bank representative to decide what type of accounts to open. The first and most important account you will need is a checking account. This will allow you to deposit funds and pay bills from the same account.
Like personal accounts, business accounts come in a variety of types. Here are just a few to consider:
- Limited use accounts – small start-ups who do not anticipate a lot of deposits and withdrawals at the beginning may want to opt for the free checking services many banks offer. These limited use accounts usually allow the account holder to have a certain number of checks written and deposits made each month with no fees. Of course, if you go over the predetermined number, the fees will likely be higher than on other accounts. Still, they are an inexpensive option for brand new businesses.
- Interest checking – once your business starts making money, the odds are you will have a considerable amount of funds sitting in your account each month. So why not make a little money on that balance? Interest checking accounts usually require the account holder to maintain a certain balance in order to receive monthly interest. Just be sure no fees are incurred should the balance go below the set amount.
- Overdraft protection – it’s not uncommon in the first few months of any new business for payments from clients to come in more slowly than the money flowing out to pay your bills. Overdraft protection can save you large penalties in the event your account falls short of funds when you pay your bills.
- Automatic bill pay – this can be a nice benefit for paying set monthly bills like rent, loans and even utilities. It just takes a few minutes to set up an account that allows you to set the day and amount the bank will pay to cover certain bills for you. For those who are uncomfortable with allowing someone else to have access to your account in such a manner (or who do not have set amounts to pay), there is another option which allows you to set the bill pay ahead of time but requires your authorization on the day the bill is due in order for the funds to be released.
- Free checking – completely free checking is not as easy to find these days as it once was but there are still banks and credit unions willing to offer these services to smaller clients. The one drawback is the institution usually requires a hefty balance to be maintained in the account in order to reap the benefits of a no fees or low fees account.
Figuring out what type of checking account to open can be overwhelming, so be sure you take the time necessary to have your bank representative go over all your options and clearly outline the pros and cons of each account type. Also, be sure to ask for a complete list of fees so you can compare accounts before making your final decision. Once you have all the facts you should be able to easily make up your mind as to what type account will work best for you and your business dealings.