Opening a business bank account is an essential first step towards ensuring the continued financial success of your business.
Importantly, commingling your personal and business funds can cause legal problems down the road, so it's wise to open a new account for your business the moment you begin taking transactions.
In this article we'll cover everything you need to know about opening a new business bank account, with a particular focus on how it works in Virginia.
Note, however, that we're only covering general information, and nothing in this article constitutes legal or financial advice.
If you have specific questions about what you should do in your specific situation, please speak to your accountant or an experienced legal professional.
Contents
- Why Do I Need a Business Bank Account?
- Documentation You'll Need to Open a Business Bank Account
- How to Open a Business Bank Account
- Business Bank Account FAQs
- Key Takeaways
Why Do I Need a Business Bank Account?
Opening a business bank account is an easy way to organize your finances and maintain a healthy business.
It's highly recommended that you open a new business bank account the moment you begin accepting or spending money via your business.
When you start a new business, you'll have to follow a few specific steps to ensure your business remains compliant with state and federal laws.
One of these steps is to obtain a federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
Once you apply for and receive an EIN, you can take this number to your local bank of choice to open a new bank account for your business.
Importantly, it is necessary that you open a new bank account for your business at the early stages of your venture to ensure your continued limited liability.
Failing to separate your personal assets from those of your business can lead to increased risk that you will be held personally liable for your business's losses or debts.
The legal term for this risk is "piercing the corporate veil," and it's a very real and immediate problem that you'll need to manage.
To expand on this topic a little, there are two primary reasons to open a business bank account:
- Increased limited liability protection due to the separation of business and personal funds.
- Additional perks that make running your business easier.
We'll outline each below.
Limited Personal Liability
The phrase "piercing the corporate veil" refers to a situation where a court can put aside the concept of limited liability and hold a business's owners personally liable for the business's actions or debts.
Since the whole point of a formalized business structure is to limit your personal and financial liability, you can see how this might be a big deal when it comes to your business.
Under law, you and your business are separate entities.
However, in certain egregious cases (such as if you mingle your personal funds with those of your business) a court can bypass the limited liability of your business structure and hold you personally accountable for any debts or liabilities owed by your business.
This means that creditors can go after your home, personal accounts, and any other feasible assets to pay down your business's liabilities.
The easiest solution to prevent this is to take steps to separate your business interests and assets from your personal interests and assets.
This is where a business bank account comes in.
Business banking solutions offer additional limited liability protections by keeping your business and personal funds separate.
For this reason, while you are not required by law to open a bank account for your business, the relative ease at which you can do so, and the numerous legal headaches it can save, make opening a business bank account an essential element of your continued personal liability protections.
Additional Benefits of Opening a Business Bank Account
In addition to personal liability protections, business bank accounts also open up a variety of other opportunities and tools that can make running your business easier.
As just a few of the common benefits you will see from opening a business bank account:
- Professional Finances — One major perk of business bank accounts is that customers can make payments with credit cards and checks through the bank's merchant services system. This offers purchase protections to your customers and ensures their information is secure.
- Decentralized Money Handling — Another major perk is that you can delegate financial tasks to your employees rather than having to handle them yourself. For example, while you may have to make a deposit in person for your personal account, you could send an employee to the bank to handle day-to-day banking tasks on behalf of your business.
- Line of Credit Options — Business banking solutions usually come with options to open a line of credit with the bank. You can use this credit to accelerate your business by purchasing upgrades and other improvements that can help you make more money in the long term.
- Taxes are Easier — Having a separate bank account can make computing and filing your taxes easier at the end of the year, as you don't have to manually sort through and categorize personal and business expenses.
Note that these are simply the most common benefits, and there are often numerous other ways for you to leverage a new account into continued financial success for your business.
Documentation You'll Need to Open a Business Bank Account
Key documentation includes tax information and proof that you can legally sign contracts for the business.
The documentation you'll need to set up the account will largely depend on the structure of your business (LLC, S corp, etc.) as well as the specific requirements of the bank you're working with.
As a quick rundown of the differences between some common business structures:
- Sole Proprietorships — Sole proprietorships generally have no formal business structure, and thus have lower documentation requirements when opening business bank accounts. Generally, you'll just need either your social security number or your federal employer identification number (EIN) to open the account. In some cases, you may also need documentation showing that you're connected to the business, such as a business license or certificate.
- General Partnerships — Partnerships without formal business structures will generally need the business's EIN, a copy of the partnership agreement (which names all partners), and a business name certificate or other documentation showing the business's names alongside all the owners.
- Limited Liability Companies — As a more formal business structure, the documentation requirements for LLCs are slightly more complicated. To open a business bank account, you'll generally need the LLC's EIN and a copy of the articles of organization, alongside any other documents that show you can legally sign contracts on behalf of the business.
- Corporations — To open a new business bank account for a corporation you'll generally need the business's EIN and a copy of the articles of incorporation, alongside any other documents that show you can legally sign contracts on behalf of the corporation.
You'll notice that there's a common theme in all of these documentation requirements.
Namely, that you will need documentation to show (1) the name and general nature of your business, (2) that your business is set up to report taxes and other financial information to the IRS, and (3) that you have the authority to sign legal documents and open accounts on behalf of your business.
As long as you have documents that show all three of these factors, you should be able to quickly and easily open a bank account for your business at your preferred financial institution.
How to Open a Business Bank Account
Opening a business bank account can take as little as a few minutes of your time, while the benefits of doing so are immeasurable.
In most cases, choosing the right bank and the account you'll need to open will be the hardest part of opening a business bank account.
In fact, the actual process of opening the account should only take a few minutes either online or in person at your local branch.
We'll outline the basics of the process below, but please remember that this list is merely the general process you'll encounter.
Your specific experience might be different depending on your state and the bank you choose to open an account with.
1. Determine which accounts you'll need.
As with personal bank accounts, there are several different account "types" you'll have to choose from.
Depending on your business's needs, you may need to open two or more accounts to properly manage all of the funds going into and out of your business.
Specifically, there are four broad account types to look out for:
- Business Checking Account — A business checking account is the "general use" account that you'll use to manage payroll, account for large expenses, and generally keep your business running.
- Business Savings Account — Some businesses choose to store their profits in a high-interest savings account to help gain additional interest on their funds. These accounts usually come with restrictions (such as a limit on the number of transactions) to offset their relatively high return rates (usually between 0.2% and 1.0% annually).
- Merchant Account — Businesses that accept credit and debit card payment should set up a merchant account or a similar solution (such as Stripe or Square) to process these payments.
- Credit Card Account / Line of Credit — Businesses live and die by their cash flow, and many businesses use credit accounts to help leverage current goodwill into future profits. Acquiring a line of credit can help mitigate any financial problems you might have down the road.
Our general advice is to open at least a checking account and a line of credit that matches your business's needs while outsourcing your merchant account needs to a service such as Stripe.
However, all businesses are different, so it's often wise to speak to an attorney or CPA who has an understanding of your business before making any final decisions on the account types you'll need.
2. Select a bank or credit union that fits your scope.
Generally speaking, the bank you choose should have a good balance of personal comfort (i.e. you like using them) and persuasive account options (such as low fees and sign-up bonuses).
You should consider all the following factors when looking at business bank account offerings:
- Interest rates for all savings, checking, and credit accounts.
- Introductory offers.
- Monthly and incidental fees.
- Minimum balance requirements.
- Number of "fee-free" transactions per account type.
- ATM access and physical cash withdrawal/deposit options.
- Ease of moving money around (wire transfers, payments, etc.).
- Online and mobile banking options and capabilities.
- Additional features, such as accounting integrations, trust account options, etc.
However, the most important factor is often your personal feeling.
Since most business bank accounts offer similar rates and perks, your ultimate decision will often depend on feeling rather than hard facts.
Put simply, if you ignored all the numbers and looked solely at aesthetics, customer service, and proximity to your local area, which bank or credit union do you want to work with?
Often, this will be the deciding factor on which bank you go with in the end.
3. Gather the required documentation to open the account.
This step should be relatively easy, as most business owners will have access to their business's EIN and other important documents.
If you've yet to apply for a EIN with the IRS, you can get one immediately online.
As we stated above, these requirements can change based on your business structure and the bank you're working with, so it might be wise to call ahead to ensure you have all your documentation together.
4. Apply for the account online or in person.
Most banks let you open business bank accounts online, provided you can sufficiently prove the factors outlined above.
In cases where the bank can't verify your identity or your connection to your business through their online portal, you may have to visit a branch in person.
As one important note, remember that banks are strongly incentivized towards helping business owners set up accounts.
For this reason, just calling the bank and asking for help if you get stuck is a perfectly valid strategy for making sure everything is set up the way you want it.
5. Deposit funds begin using the account.
Once you finish setting up your accounts you can deposit your funds and start using the account as if it were a normal bank account.
In fact, the only real difference is that the only your business's money will go into and out of the account (since the whole point was to avoid commingling your funds).
6. Connect the account with any third party software.
Finally, you can take steps to connect your new business account to any third party solutions you may use to track or manage your financials.
If you choose to use a merchant services account such as Stripe or Square you should begin with those.
However, you should take care not to neglect other important software, such as any invoicing solutions or other financial tools you use to manage your business.
Business Bank Account FAQs
It's strongly recommended that you speak with an attorney or CPA if you have any questions about business bank accounts.
At what point do I need a business bank account?
Generally speaking, the threshold at which you need to open a business bank account is the same as the threshold for reporting your business's income to the IRS.
Specifically, if you make more than $400 to $600 from your side business in a single calendar year (or expect to make more than this amount in the future), you should probably open a business bank account.
While sole proprietorships and partnerships may be able to fly under the radar to some extent, registered businesses such as LLCs and corporations must open a new account to retain their limited liability protections.
What documentation do I need to open a business bank account?
In most cases, the bank will ask for a tax identification number (such as an EIN) as well as various documents pertaining to the business and its ownership.
These requirements can change based on your business structure and the bank you choose to go with.
For this reason, you should check the bank information pages for the accounts you're planning to open to see what documentation the bank needs.
What's the difference between a bank and a credit union?
The primary difference is that a bank is a for-profit entity while credit unions are generally non-profit and community- or member-focused in nature.
This means that credit unions generally have better offerings in your local area, but may struggle to compete at the national level when it comes to convenience, ATMs, and financial technology.
When it comes to business bank accounts, credit unions are often preferable due to their generally better customer service and generally lower fees and overhead costs.
However, larger organizations may prefer to open accounts with banks due to the additional structure and resources available.
What is a merchant account and what do they do?
A merchant account is a special kind of bank account that gives a business access to any funds received through credit and debit card payments.
However, traditional merchant accounts are progressively falling out of style due to numerous cheaper and faster options which have entered the market over the past few years.
As a result, most new businesses instead choose to use online payment processing solutions such as Stripe or Square which combine the functionalities of merchant accounts and gateways (the technology that accepts debit and credit card purchases from customers) into one.
Specifically, these payment processing solutions will accept and route payments through their systems (rather than through a separate merchant account) and then deposit these payments straight into the bank account of your choosing.
Key Takeaways
All reputable businesses use separate business bank accounts to manage their finances.
Business bank accounts play a key role in your business's ongoing financial and legal health.
For this reason, it's strongly recommended that you open a new account the moment you begin taking transactions or otherwise passing money into and through your business.
As a few key things to keep in mind:
- Keeping your personal and business assets separate is an important part of maintaining your limited liability protections as a business owner.
- In general, you'll need some kind of tax ID number and proof that you own and / or can sign for the business before you open your bank account.
- Most businesses choose to open a checking account and some form of credit account for their business.
- If you need to accept credit or debit card payments you'll need a merchant account. However, most businesses are choosing online options such as Stripe or Square over opening such an account with their bank.
If you have any questions about what kind of account you need or what financial practices you should follow, we highly suggest you speak with an accountant and a legal professional about your business.
Only an individual who has experience in your local state and jurisdiction can give you accurate advice about local best practices and what you should do to reach your financial goals.
Further Reading
- “Doing Business As” (DBA) Registration in Virginia
- How to Get a Small Business License in Virginia
- How to Start a Business in Virginia: A 10-Step Guide
- Piercing the Corporate Veil and Virginia LLCs
- Virginia Limited Liability Company Taxes
