Establishing a Limited Liability Company (LLC) in the U.S. is a significant milestone. It creates a legal distinction between your personal finances and your business. However, there is still an important step that must be taken. You must create a business bank account. This makes your finances clean and keeps your personal finances safe.
New business owners often find this process confusing. It is true that banks request a lot of documents and have their own set of rules. This guide will make everything easier for you. This guide is targeted to teach you how to open a business bank account for LLC and also document your eligibility. These steps will ensure that you set up your business banking correctly.
Opening a business bank account is a basic step in proper financial management and is often covered under what is business administration for new business owners.
Why Your LLC Needs Its Own Bank Account
Mixing your personal and business finances can create problems, especially during tax season. It also puts your personal savings in danger. This is known as piercing the corporate veil. If you mix your funds, a court may rule that your LLC is not legitimate. Creditors would then be able to claim your personal assets, such as your house or car.
Having a separate bank account for your business adds to your credibility. It shows that you’re serious about your business, and it helps clients trust you more. You’ll also be able to easily accept credit card payments.
It also helps you build business credit, which is important if you ever need to take out a loan. Once your account is active, you should also learn how to check your business credit score regularly to track your financial credibility. Lenders will be more likely to approve you if you have a good banking history.
Step 1: Choose an Appropriate Bank
Banks are not all the same. Here are your main options: You can go with a national bank. You can go with a local bank or credit union. You can go with an online bank.
National Banks:
These banks are everywhere and provide many services. Because of this, they are very expensive. They may have high minimum balances, and they charge high fees.
Local Banks and Credit Unions:
Local banks are nice because you can build a personal relationship with the banker. Fees are lower because they can offer that, and they support local businesses. Unfortunately, they don’t have the same updated technology, so you may not have good apps or many ATMs.
Online Banks:
These banks have no fees and provide great interest, which is why they are so popular. But you can’t deposit cash, and you don’t have the convenience of a branch.
All of these things should go into your decision. Do you use cash? Do you travel? Do you want to avoid fees? Pick the bank that fits your daily operations.
Step 2: Prepare the Necessary Documents
This is the most critical aspect. Because of the fraud, the banks have to prove that the business exists and to verify who the customer is. So these documents need to be collected before going to the bank.
Employer Identification Number (EIN)
The EIN is the business equivalent of a Social Security Number. The IRS issues this number, and the majority of banks will require one. If you don’t have an EIN, opening a business bank account is not going to be possible. So, obtain the IRS letter containing the EIN.
Articles of Organization
This is the certified document you received from the state upon filing the paperwork to create your LLC. This document proves the business exists and contains the business name and address. The certified document contains the state stamp and should be presented.
Operating Agreement
This document is critical to include for multi-member LLCs. It contains the names of the owners of the company and lists out who is authorized to manage the funds. This document is also required to be included by some banks for single-member LLCs. This document shows that you have the capacity to open the account.
Personal Identification
In order to open an account, banks need to verify your identity. You must bring in your driver’s license or passport. If you have business partners, they have to come in person as well and bring their IDs. Some banks require you to have a secondary form of ID that can be a credit card or a recent utility bill.
Business License
Depending on your field, you may be required to have a license. A restaurant must have certain health permits. A contractor must have a trade license. Bring copies of any licenses your business holds. This indicates your business is legitimate.
Step 3: Check Your Eligibility
Most LLC owners can open an account without an issue. However, some barriers exist. The bank will check your record and see if you are in a tool called ChexSystems. This is a reporting tool that tracks bank account activity.
If you owe another bank money, you will likely be denied. A record of check fraud will cause an issue. Make sure old bank debts are resolved. There are also age restrictions. You need to be at least 18 to enter into contractual obligations.
A few industries are considered high risk. These are gambling, cannabis, and adult entertainment. Banks will most likely decline these applications, or they may require additional documents. Make sure you know your industry classification before applying.
Step 4: Apply for the Account
You are ready! You have your financial institution, have organized your documentation, confirmed your eligibility, and are ready to submit your application.
Applying in Person
To start, call this branch of the institution. You will need to make an appointment, as this will help save time and make the process smoother. Be specific about what documentation will be necessary. Bank policies and procedures can change. You will need to have your original documentation. Don’t bring copies unless you are told to do so. All owners will need to sign the necessary forms, so confirm that everyone will be able to be present.
Applying Online
Most financial institutions allow customers to apply through their website. This method is often the fastest and the most straightforward. You will need to scan the relevant documents and upload them. You will also have to input your personal information. The bank will complete an electronic verification as part of the process. The bank can sometimes complete this step instantly, but be aware that it can also take a few days.
Step 5: Fund Your Account
Your account is now open at the bank. It is time to fund the account. Most banks have a minimum balance for opening deposits, anywhere from $5 to $1000. You can place the funds as cash or hand them a check from your personal account. The funds can also be transferred through a wire transfer. The account gets activated with your initial deposit.
Step 6: Set Up Banking Tools
After the account gets activated, your tools should be set up. If necessary, order business checks. You will be issued a debit card for business expenses. You should set up online banking right away. There is a mobile app you will have to download. Your accounting software should be linked to your account. This makes your bookkeeping automated.
You should consider getting a business credit card. You can apply for one at the same bank. It helps separate expenses further and also improves your business credit score.
Mistakes to Avoid
People tend to rush and make basic mistakes when opening a new bank account. Here’s what to avoid.
- Wrong Name: The name on your new account has to be your LLC name exactly, down to the spelling, and including your DBA. If you’ve got a DBA, you need to bring the certificate.
- Ignoring Fees: Read the fee schedule. Some banks will penalize you for too many transactions or charge you for paper statements. Figure out what the fees will be before signing and ask about how to avoid a monthly fee. If you keep a specific minimum balance, you can usually avoid the fees.
- Mixing Funds: Don’t go back and forth transferring money. Pay yourself a salary or an “owner’s draw.” Move a chunk to your personal account and then spend from there. Avoid paying personal bills from your business account.
- Forgetting to Update Info: If you move, the bank needs to know. If there are partner changes, the account needs to be updated. Having old info floating around is a security risk.
