Opening a business checking account is an important part of setting your business up for success. However, for first-time business owners, opening a business checking account can seem complex and confusing. This blog will help clear up that confusion by covering the necessary documentation, the criteria for selecting the right bank or credit union, and the various features to look for in a business checking account. It will also outline the benefits of having a dedicated business account and offer tips for managing business finances effectively by using this type of account.
Why You Need a Business Checking Account
Business checking accounts are more than just essential tools for success. In fact, the IRS strongly recommends that all small business owners maintain separate checking accounts for business expenses for tax purposes. Besides making tax accounting easier, business checking accounts come with other clear benefits.
Separation of Personal and Business Finances
One of the requirements for filing your taxes as a small business is reporting all income and expenses accurately. This can be difficult to do if your business and personal checking accounts are combined, and it can lead to trouble if the IRS ever chooses to audit your tax returns. By keeping your business account separate from your personal finances, you protect your personal financial transactions from scrutiny if the IRS ever decides to look more closely at your business finances.
In addition, a separate business checking account makes bookkeeping and financial management easier, especially when it comes to fulfilling the IRS’ requirement of paying quarterly estimated taxes on business earnings.
Professionalism and Credibility
Many small business owners choose their fields based on what they love to do, resulting in making money through a hobby such as crafting or baking. However, as you transition from a hobbyist to a business owner, you want to make sure to separate yourself from your product or service, and a business checking account serves that purpose.
You want customers to see and treat you like a business rather than as an individual who dabbles in hobby-like pursuits. In addition, as your profits and losses ebb and flow over time, the existence of a business checking account shows the IRS that you are professional and legitimate.
Documentation Required to Open a Business Checking Account
Now that you understand its importance, it’s time to learn how to open a business checking account. The good news is that it’s not much more difficult than opening a personal checking account as long as you have all your business documentation in order. At a minimum, you will need the following documentation to open your business checking account:
- Business Formation Documents: These will vary based on your location, as different states, counties, and cities require unique paperwork to incorporate your business.
- Employer Identification Number (EIN): This is the federal tax number issued by the IRS once you file the paperwork associated with starting your business.
- Business Licenses: Depending on the field in which your business operates, you will also need to show proof of licensure. Again, this may need to come from federal, state, county, and/or city authorities.
You will also need to provide other basic information about your business, including the address and name of your company, names and information for all individuals authorized to access the account or who act as co-owners, and personal identification such as a driver’s license.
Selecting the Right Bank or Credit Union
Another important point to consider is where to find the best business checking account in your area. In general, this means considering both banks and credit unions as well as some additional factors.
Comparing Banks and Credit Unions
One of the first factors to consider when looking for the best business checking account in your area is the difference between business accounts at banks vs. credit unions. As with personal checking accounts, there are benefits and drawbacks to each decision. For example, credit unions are known for their community focus and personal attention. However, they often require individuals or businesses to live or operate within a certain field or geographic region to become members.
Although banks don’t feature the same limitations, it’s important to note that for-profit institutions offer a less personal experience, which may be a deterrent for a small business owner. Large banks also reserve their best incentives for individuals and businesses with the largest investment (i.e., cash balances), which may be hard to reach as a beginning business.
Factors to Consider
In addition to choosing between a bank and a credit union when opening your business checking account, you also want to compare the actual financial options that each institution offers for their business checking accounts. At a minimum, this should include:
- Fees: Look for an institution that offers low or no fees for small business checking accounts. With all the expenses you will incur upon opening your business, it’s wise to avoid the burden of additional or exorbitant financial fees.
- Account Access and Convenience: As a business owner, you will often need to make deposits and withdrawals. Therefore, you want to make sure that your financial institution offers convenient branches in your area as well as access to a network of ATMs.
- Additional Services: Many community-focused financial institutions, such as credit unions, will offer additional services to their small business members that are designed to help set the business up for growth. These additional services may include business financial counseling, small business loans, and more.
Opening a Business Account at HRCCU
When it comes to setting up your business for success, partnering with a local financial institution that understands your needs is critical. At Hudson River Community Credit Union, our localized focus is on individuals and businesses who live or operate within the boundaries of Saratoga, Warren, Washington, and Rensselaer counties or the Towns of Cohoes, Watervliet, or Green Island. Contact us today to learn more about our business checking account options as well as the additional services we offer for other businesses operating in the community we love.
