When starting a business, you already have tons of questions running through your mind. Even with the accessibility of information, you may still feel overwhelmed. Banking-related questions get asked the most, besides startup costs, business licenses, and choosing a business entity type.
Do I have to open a bank account for my Shopify store?
I want to start an Etsy page. Do I need a bank account?
Is it mandatory for a sole proprietorship to have a bank account?
The answer is no to all three of those questions. When you are in a pseudo phase (i.e., testing a concept to determine if a business idea is viable or not), the last thing you want to do is make drastic decisions that involve an outlay of cash.
Once you have tested proof of concept and decide to turn your craft hobby into either a side or full-time business, opening a business bank account should become a priority.
A business becomes a separate entity once established. Having a bank account solely for business purposes is one way to separate from personal finances. Having a bank account for business does require business documents, but it has its advantages.
It gives you peace of mind when sorting financial transactions.
Having an online business (website, shop listing) means 24/7 access. The more sales you make, the more transactions there are. Plus, you will have expenses (recurring, one-time fees) that can pile up quickly. A business account makes it easier to see incoming and outcoming financial activities for the month. When business and personal transactions are operating out of the same bank account, not only do you have to sort out transactions, but the more business transactions you have, the longer it takes to go through the bank statement and separate the transactions.
Taxes and Accounting Purposes
Businesses are required to pay taxes and account for financial activities within the company. Whether you hire an accountant or outsource to a CPA firm, either way, you will have to provide financial reports. Also, during tax time, you are expected to have records if the Internal Revenue Service (IRS) conducts an audit.
A Business Account is a Business Account
When business and personal financial activity come from the same account, the temptation to overspend increases and spending gets underestimated. Having a bank account for business purposes allows you to see spending patterns and habits. Also, you have a realistic picture of how much cash is actually in the bank.
When you monitor your business account, you have a business attitude towards it. You can gauge if your product or service pricing is off or not. You can forecast and make adjustments where needed.
Even though it is crucial to separate business from personal financial activity, new business owners still have questions about the subject matter.
How much money is needed to open a business bank account?
Every minimum bank amount is different. It also depends on your startup costs and first few months of expenses. Before going into a bank, make a list of startup costs and fixed/variable expenses. Then multiply that number by the number of months you want to cover. The last number indicates how long your business can operate without any sales.
Are Limited Liability Companies required to have a business account?
Every business entity has different requirements. Since an LLC is a separate entity, there needs to be a business account in the name of the LLC.
When choosing a financial institution for business banking, it is best to speak with an accountant first. Suppose you’re unable to pay for consulting services in the beginning. In that case, you can always read customer reviews, speak with current and former customers (be sure to ask specific questions) and see if the bank has accessible locations near your business.
What questions should you ask before selecting a bank?
First, gain a clear understanding of the minimum amount to start. The following questions should be regarding fees. What monthly fee will your business have to pay? Are you required to keep a minimum balance in the account? Does the bank work with small businesses? What is the bank’s history of working with local businesses? What percentage of small businesses are approved for loans and lines of credit if ever needed.
What documents are needed to open a business account?
A tax identification number, business name registration through the county’s office, and business license meet the requirements for most businesses. However, depending on the city and state of residence, requirements may differ. Some corporations and LLCs (Limited Liability Companies) may require Articles of Incorporation.
As you can see, there’s a cost to start a business bank account. Still, the ease of seeing cash flow activities from an account specifically for business is less confusing and easy to reference later down the line.