What Is a Business Account?

Updated: May 21, 2024

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A business bank account is a checking or savings account designed for managing a business entity's finances. Its primary purpose is to keep personal and professional spending separate, ensuring that all business expenses, income and purchases are recorded separately from personal spending.

Having a business account not only helps you stay legally compliant but also provides liability protection by establishing your business as a distinct entity. Notable features and benefits of a business account include access to business-specific banking services, higher transaction limits and the ability to build business credit.

A business bank account also enables you to establish a relationship with your bank, facilitating access to various banking products and services as your business grows, including retirement planning, merchant services and small business loans.

Key Takeaways

Open a business bank account to separate personal and business finances, ensuring legal compliance and ease of documentation.

Select a business bank account that aligns with your business needs, considering factors like fees, interest rates and online banking features.

Leverage a business account to establish your business’s credit history and improve your eligibility for commercial loans and lines of credit.

Benefits and Drawbacks of a Business Bank Account

Having a dedicated business bank account offers several important benefits for entrepreneurs and business owners:

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    Protection

    A business bank account provides limited personal liability protection, separating your personal assets from your business liabilities. Additionally, it offers purchase protection under merchant services, safeguarding your transactions.

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    Professionalism

    Having a dedicated business account enhances your credibility and professionalism when dealing with clients and suppliers, presenting your venture as a legitimate and well-organized entity.

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    Preparedness

    Many business bank accounts come with a line of credit that you can utilize for emergencies, significant business purchases or bridging cash flow gaps.

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    Purchasing Power

    A business bank account can help establish your business's credit history, enabling you to secure loans and make substantial startup purchases or investments as your company grows.

While business accounts offer numerous benefits, there are also some drawbacks to consider:

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    Fees and Costs

    Business accounts often come with higher fees compared to personal accounts. These fees can include monthly maintenance fees, transaction fees and other service charges that can quickly add up.

    For instance, some business checking accounts may charge a monthly maintenance fee, which can be waived if certain conditions are met, like maintaining a minimum daily balance or completing a certain number of transactions. Additionally, business accounts may have fees for services like wire transfers, overdrafts and ATM usage, which can further increase costs.

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    Minimum Balance Requirements

    Another common drawback of business accounts is the requirement to maintain a minimum balance, which can be significantly higher than personal accounts. This minimum balance requirement is often in place to avoid monthly maintenance fees or to qualify for interest on the account.

    If the minimum balance is not maintained, penalties may be incurred, such as additional fees or a reduction in interest earned.

Key Features of a Business Bank Account

Business bank accounts offer a range of features designed to streamline financial management, enhance credibility and support business growth.

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    Overdraft Facilities

    Overdraft facilities provide a safety net for managing cash flow. They allow businesses to borrow a set amount of money when their account balance falls below zero. This can be useful for covering unexpected expenses or bridging gaps in cash flow.

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    Online Banking Tools

    Online banking tools are a standard feature of business accounts, offering a range of services such as digital payments, payroll management and account monitoring. These tools enable businesses to manage their finances remotely, making it easier to stay on top of transactions, pay bills and monitor cash flow.

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    Merchant Services

    Merchant services are payment processing solutions that can be linked to business accounts, enabling businesses to accept various forms of payment from customers. These services facilitate secure and efficient transactions, enhancing the customer experience and increasing sales.

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    Debit and Credit Cards

    Business debit and credit cards are available with many business accounts, providing a convenient way to manage business expenses and make transactions. These cards can help track business expenditures, making it easier to prepare tax returns and monitor cash flow.

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ARE BUSINESS BANK ACCOUNTS FDIC-INSURED?

Yes, the FDIC (Federal Deposit Insurance Corporation) insures business bank deposits, protecting business owners if a bank fails. The FDIC insures deposits up to $250,000 per depositor, per insured bank, covering a range of business accounts, including checking, savings, money market deposit accounts and certificates of deposit (CDs).

Types of Business Bank Accounts

Understanding the different types of business bank accounts helps you determine the right options for your business. You may also need to open more than one account based on your specific needs, as each type serves a unique purpose.

Business Checking Account

A business checking account functions similarly to a personal checking account but often offers additional features tailored to business needs. These features may include free wire transfers, scanners for bulk check deposits and higher transaction limits. Business checking accounts are designed for frequent transactions, making them ideal for managing daily business operations.

Business Savings Account

A business savings account is designed to help you set aside funds you don't need immediately. It can earn interest, providing a low-risk way to grow your business's savings over time. Business savings accounts can help build an emergency fund, save for taxes or set aside money for future investments.

Merchant Services Account

A merchant services account enables your business to accept credit card payments from customers while protecting their sensitive data. This type of account typically includes payment processing solutions, ensuring secure and efficient transactions. Merchant services accounts are essential for businesses that rely heavily on credit card transactions, such as retail stores or online marketplaces.

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FEES TO CONSIDER WITH MERCHANT ACCOUNTS

When choosing a merchant service account, be aware of the various fees associated with processing payments:

  • Discount Rate and Transaction Fee: A percentage of each transaction plus a flat fee charged by the payment processor for facilitating the transaction.
  • Setup and Cancellation Fees: One-time fees for setting up or closing a merchant account, which can be costly.
  • Monthly Minimum Processing Fee: Fee charged if your business doesn't meet a minimum processing threshold, ensuring the payment processor earns a minimum amount.
  • PCI Compliance Fee: A fee for ensuring your business meets Payment Card Industry (PCI) security standards to protect customer data.
  • Chargeback Fees: Fees incurred when a customer disputes a transaction, which can be costly and time-consuming to resolve.
  • Statement Fee: A fee for receiving a monthly statement, which may be waived if you opt for paperless statements.
  • Address Verification Service (AVS) Fees: Fees for using AVS to verify customer addresses, helping prevent fraud.

These fees can add up quickly and ultimately affect your business's bottom line.

How to Choose the Best Business Bank Account

When selecting a business bank account, there are several key points to finding the best fit for your business needs. Here are some important areas to look out for:

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    Monthly Fees

    Look for accounts with low or no monthly fees, especially if you're a small business or startup with limited cash flow. Be aware of any conditions that may waive these fees, such as maintaining a minimum balance.

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    Minimum Balance Requirements

    Check if the account has a minimum balance requirement to avoid monthly fees or to earn interest. Ensure you can comfortably maintain this balance to avoid penalties.

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    Interest Rates

    If you plan to keep a large balance in your business account, look for accounts with competitive interest rates to earn some return on your money.

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    Transaction Limits

    Consider the number of transactions you expect to make each month and choose an account with a suitable limit. Exceeding this limit may incur additional fees.

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    Check and Cash Deposits

    If your business frequently deals with cash or check deposits, look for accounts with convenient deposit options, such as mobile deposits or a large network of ATMs or branches.

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    Introductory Offers

    Take advantage of introductory offers, such as bonus cash or waived fees, to get your business off to a strong start.

What You Need to Open a Business Bank Account

To open a business bank account, you'll need to provide several documents and pieces of information. These requirements can vary between banks.

Personal Information

The following personal details are usually required when you open a business account:

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    Social Security Number

    Your Social Security number is used to verify your identity and may be required for certain business structures, such as sole proprietorships.

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    Government-Issued ID

    To confirm your identity, you need a valid government-issued ID, such as a driver's license or passport.

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    Home Address

    Your home address is required for account setup and may be used for communication purposes.

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    Personal Phone Number and Email

    Your personal contact information is needed to set up online banking and receive account notifications.

Business Information

To open a business account, you usually need to provide the following business details:

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    Business Name and Doing Business As (DBA) Certificate

    If your business operates under a name different from your personal name, you'll need a DBA certificate to verify this.

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    Business License

    Depending on your business type and location, a business license or permit is often required.

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    Employer Identification Number (EIN)

    An EIN is a unique identifier assigned to your business by the IRS and is usually required for business bank accounts.

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    Business Formation Documents

    Depending on your business structure, these may include articles of incorporation, articles of organization or a partnership agreement.

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    Business Operating Agreements

    If you have a partnership or multimember LLC, you may need to provide a business operating agreement outlining the ownership structure and roles.

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    Business Ownership Agreement

    In some cases, documents detailing business ownership, such as a buy-sell agreement, may be required.

How to Open a Business Bank Account

Opening a business bank account requires some effort, but the process is relatively easy if you know the steps. Here's a step-by-step guide to help you get started:

1
Prepare the Necessary Documentation

Gather all the required documents, including personal and business information, to ensure a smooth application process. This may include your Social Security number, government-issued ID, business license and Employer Identification Number (EIN).

2
Explore Different Banks

Research and compare various banks to find the one that best suits your business needs. Consider factors like fees, interest rates, branch and ATM access and online banking features to make an informed decision.

3
Apply for a Business Account

Once you've chosen a bank, you can apply for a business account online, by phone or in person. Be prepared to provide the necessary documentation and answer questions about your business's structure, purpose and expected transaction volume.

4
Make an Opening Deposit

After your application is approved, you'll need to make an opening deposit to fund your new business account. This can usually be done via transfer from another account, cash deposit or a check deposit. The opening deposit amount may vary depending on the bank and account type.

SHOULD YOU APPLY ONLINE OR IN PERSON?

Some banks offer the flexibility to apply for a business bank account online or in person. The choice between these options depends on your specific needs and preferences. Applying online provides convenience, allowing you to complete the application at your own pace and from anywhere.

Applying in person can offer more hands-on service and allow you to ask questions from a bank representative. Consider your comfort level with technology, the complexity of your business structure and your need for personalized support when deciding which application method is best for you.

FAQ About Business Bank Accounts

MoneyGeek compiled answers to some of your frequently asked questions about business bank accounts and the types available.

Why do you need a business bank account?
Can you use your personal bank account for business purposes?
What is the best way to manage a business bank account?
Do you need both checking and savings accounts for your business?
How long does it take to open a business bank account?
Does opening a business bank account hurt your credit?

About Alvin Yam, CFP


Alvin Yam, CFP headshot

Alvin Yam is a certified financial planner (CFP) with over 15 years of experience working with individuals and corporations. Before founding Paraiba Wealth Management, he was a director at HSBC and a financial consultant at Charles Schwab. Yam is MoneyGeek's expert consultant on wealth management and personal banking.

Yam earned his bachelor's degree in political science from the University of California, San Diego and his Master of Business Administration from Loyola Marymount University.


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