One of the first pieces advice I give to business owners is to track everything. Every transaction for money coming into the business (income) and money going out of the business (expenses) needs to be captured and categorized to ensure that you are able to get a clear picture of your business financials. But doing so requires that you know the difference between what’s business and what’s personal, and the easiest way to make that distinction is to open a business bank account. So how do you go about doing that?
STEP 1 - Get an Employer Identification Number (EIN).
Think of an EIN as the social security number for your business that is required on a lot of documents that you’ll be completing in relation to the business. Banks require this as an identifying number for your company in order to open an account so you’ll need to have that number on hand. It’s free and only takes a few minutes to complete the process at irs.gov/ein.
Even if you are a sole proprietor, you should open a separate account for your business finances. Banks offer several different types of accounts with varying monthly fee amounts as well as deposit and minimum daily balance requirements. So even if your best option based on those factors is to open the account as a personal checking or savings account, that’s ok. The important thing is that you have a dedicated account that allows you to manage business transactions separately from your personal transaction in one place. Most banks generally require new business accounts to be opened in person, however you can conduct research online in advance to get prepared.
STEP 2 - Choose a bank.
Most people choose the bank where they already have an established personal account, which is not always a bad idea. Doing so allows you to leverage the banking relationship you’ve already built, which could help in the long run as your business financial needs evolve. Make sure you choose a bank that aligns with the goals of the company - offering low fees, low interest rates, opportunities for growth (i.e. lines of credit). Working with a personal banker is a bonus, ensuring that you have a point of contact that can advise you as your business expands. And pay close attention to bank fees to ensure you don’t end up paying unnecessary money for not maintaining the required account thresholds.
STEP 3 - Review recurring business charges.
Take a look at all of the expenses that you currently have tied to your personal account and move those to your newly established business bank account. This is a good time to re-assess any recurring transactions to determine if those should be continued with the new account.
Bonus: Sign up for an accounting system to record transactions for your business. We highly recommend Quickbooks because it’s easy to use and offers features that make maintaining financial records for tax time a breeze. Connecting the business bank account directly to the accounting system means that your transactions will automatically be downloaded into the system, and you won’t have to remember how much you’ve spent or received during a specific timeframe. Since all money that flows through the account will be captured electronically for easy reference, it will extremely easy to categorize your expenses, which will be reflected on the financial statements for the business.
Inevitably, your primary focus will be on the business itself, which means the accounting function can inadvertently be neglected due to lack of time. This can create a huge headache when tax time comes because you will have to put in a lot of manual effort to gather the date needed to accurately estimate your tax responsibility. By opening a dedicated account and leveraging an accounting system, you automate that process saving you time and money in the long run.