Lesson 2: How to Open and Operate a Business Bank Account

This guide will walk you through the process, requirements, and considerations involved in setting up a business bank account.

If you have not yet decided on a bank that is best for you, check out our previous article that shares how to find the right bank for your business.

Checklist

Why You Need a Business Bank Account

Separating Personal and Business Finances

One of the primary reasons to open a business bank account is to keep your personal and business finances separate. Having a dedicated bank account for your business helps with:

1. Accurate bookkeeping
2. Simplified tax preparation
3. Maintaining the legal protection of your business structure (especially for LLCs and corporations)

Professional Image

A business bank account lends credibility to your company when dealing with clients, vendors, and partners. It allows you to accept payments in your business name and write checks from a business account.

Legal Protection

One of the most critical reasons to operate exclusively out of your business bank account—and not mix it with your personal finances—is to maintain the legal protection provided by your business structure, such as an LLC or corporation. This legal separation is often referred to as the “corporate veil.”

Understanding the Corporate Veil

The corporate veil is a legal concept that distinguishes the company as a separate entity from its owners (members or shareholders). This separation is what provides you with limited liability protection, meaning your personal assets (like your home, car, and personal savings) are generally protected from business debts and legal actions against the company.

What Are Commingled Funds?

Commingling occurs when personal and business finances are mixed—using the same bank account for both or transferring funds without proper documentation. This practice can lead to serious consequences:

• Piercing the Corporate Veil: Courts may determine that your business is not truly a separate entity because of the lack of financial separation. This is known as “piercing the corporate veil.”
• Personal Liability: If the corporate veil is pierced, you could be held personally liable for business debts and legal judgments, putting your personal assets at risk.
• Tax Complications: Mixing finances can create confusion during tax preparation and may raise red flags with tax authorities, potentially leading to audits or penalties.
• Accounting Challenges: Accurate bookkeeping becomes significantly more difficult, which can hinder financial decision-making and compliance with financial regulations.

Access to Business Banking Features

Many business bank accounts offer features tailored to business needs, such as:

• Merchant services for accepting credit card payments
• Business credit cards
• Payroll services
• Business loans and lines of credit

What Do You Need for a Business Bank Account?

When opening a business bank account, you’ll typically need:

• Business formation documents (e.g., articles of incorporation, partnership agreement)
• Employer Identification Number (EIN) or Social Security Number
• Valid government-issued ID
• Business License (if applicable)
• Initial deposit (amount varies by bank)

The above requirements may vary depending on your business structure and the bank you choose. Always check with the specific bank for their exact requirements.

How to Open a Business Bank Account for LLC

Limited Liability Companies (LLCs) have specific requirements when opening a business bank account. Most entities will follow similar steps, but you can always ask a bank representative to outline the process tailored to your business.

1. Choose a Bank and Account Type That Suits Your Business’ Needs

Consider the factors mentioned earlier in this guide when selecting a bank. Also, decide which type of account(s) you need:

• Business checking account
• Business savings account
• Merchant services account

2. Gather Necessary Documents

Once you have the bank you’d like to use, assemble the following documents.

• LLC formation documents
• EIN (Employer Identification Number)
• Operating agreement
• Business license (if required in your state)

3. Schedule an Appointment with a Bank Representative 

Remember that all members listed in your LLC’s operating agreement may need to be present when opening the account, depending on the bank’s policies.

It’s important to note that many virtual banks do not have options to meet one-on-one with a representative. If being able to meet one-on-one with somebody in person is important to you, make sure your bank has brick and mortar offices near you.

4. Bring Everything You Need To The Appointment

For in-person appointments, make sure you bring the initial deposit (if applicable) and all required documents. If you elected for a completely virtual bank, you will upload these documents on the app/website when prompted.

5. Fund Your Account

Once you have all documents uploaded, it’s time to fund your account. 

To fund it, you can deposit $X amount from your personal bank account, just make sure you mark it as owner’s equity in your accounting software (more on this in our ‘getting started with an accounting software’ article).

6. Order Checks and Debit Cards for Authorized Members

If applicable, order checks and debit cards for your employees, co-founders, or other relevant stakeholders.

Tips for Managing Your Business Bank Account

Setup Online Banking to Monitor Your Account Regularly

Keep a close eye on your account activity through online banking or mobile apps. This helps you stay on top of your cash flow and quickly identify any issues.

How to Integrate Your Bank Account with Accounting Software

1. Select the Right Accounting Software
   1. Assess Business Needs: Consider the size of your business, industry-specific features, and scalability. Our favorite accounting software for new and growing businesses is Xero.
   2. Budget Considerations: Review pricing plans, including any additional costs for payroll or advanced features.
   3. Ease of Use: Opt for software with an intuitive interface and strong customer support.
2. Set Up Your Accounting Software Account
   1. Sign Up: Create an account on the accounting software’s website.
   2. Company Profile: Enter your business information, such as legal name, address, and tax details.
3. Connect Your Bank Account
   1. Access Banking Section: Navigate to the “Banking” or “Link Accounts” section within the software.
   2. Find Your Bank: Search for your bank in the provided list. If it’s not listed, check if you can upload bank statements manually.
   3. Authorize Connection: Enter your online banking login credentials to grant the software access to your account data securely.
   4. Select Accounts to Sync: Choose which accounts you want to integrate (e.g., checking, savings, credit cards).
   5. Import Historical Data: Decide how far back you want to import transactions—typically, you can import data from the past 90 days or more.
4. Set Up Your Chart of Accounts
   1. Customize Account Categories: Modify default categories to match your business’s specific income and expense accounts.
   2. Create Subcategories: For more detailed tracking, create subaccounts under main categories.
5. Review and Categorize Transactions
   1. Automate Rules: Set up rules to automatically categorize recurring transactions.
   2. Manual Adjustments: Regularly review imported transactions to ensure they are correctly categorized.
6. Reconcile Accounts Regularly
   1. Monthly Reconciliation: Match your accounting records with bank statements each month to ensure accuracy.
   2. Adjust for Discrepancies: Investigate and correct any inconsistencies promptly.

Common Mistakes to Avoid

Mixing Personal and Business Finances

Even after opening a business account, some owners still mix personal and business expenses. This can lead to tax complications and potentially compromise the legal protection of your business structure.

Choosing the Wrong Type of Account

Make sure the account you choose aligns with your business needs. For example, if you have high transaction volumes, an account with unlimited transactions might be more cost-effective than one that charges per transaction. Most businesses only need one checking account to operate efficiently and effectively.

Ignoring Fees

Be aware of all fees associated with your account and factor them into your business expenses. Some banks offer ways to waive monthly fees if you maintain a certain balance or meet other criteria.

Not Utilizing All Available Features

Many business bank accounts come with valuable features like integrations with accounting software or cash flow management tools. Make sure you’re taking advantage of all the features your account offers.

Final Thoughts

Opening and managing a business bank account is a fundamental step in establishing your company’s financial foundation. By choosing the right bank, understanding the requirements, and following best practices for account management, you can ensure that your business finances are organized, secure, and primed for growth.

Remember, while this guide provides a general overview, specific requirements and processes may vary depending on your location, business structure, and chosen bank. Always consult with a financial advisor or the bank directly for the most up-to-date and personalized information.

If you have additional questions, you can contact us.