Business Checking Accounts: How They Work and How to Choose the Right Option

As its name suggests, a business checking account is a checking account designed for business use. It can help small business owners separate their income and expenses from personal ones. It can also help simplify your life come tax time.

At a nuts and bolts level, a business checking account is similar to a personal checking account, but you’ll need to jump through some extra hoops to open one. Below, we’ll take a closer look at business checking accounts and explore who needs them, why they can be helpful, and how to get started if you’re ready to open one.

How does a business checking account work?

Business checking accounts aren’t that different from personal checking accounts. Like a personal account, a business checking account allows the account holder—who must be or be associated with a business entity—to store and use money securely and conveniently.

For instance, a business checking account will allow you to:

• Write checks. A business checking account will still allow you to write physical checks as a form of payment.
• Make debit card transactions. Many business checking accounts are linked to a debit card, allowing you to make convenient point-of-sale transactions or order supplies online.
• Receive and send ACH and wire transfers. These two types of paperless bank-to-bank transfers make it easy and safe to make and obtain payments. Do keep in mind that some banks charge a fee for these transfers.
• Earn interest on your stored funds. Interest payments are more common with personal rather than business checking accounts. However, there should be some options to generate a return on your balance.
• FDIC insurance. As with your personal checking account, look for a business bank account that is insured by the Federal Deposit Insurance Corporation (FDIC) up to the $250,000 maximum. Importantly, this maximum is separate for business entities and individuals: The $250,000 coverage is applied to personal and business balances for qualifying businesses, bringing the maximum potential coverage up to $500,000 at the same institution. However, there is an exception: For unincorporated sole proprietorships, the $250,000 limit applies to all funds held at the same institution.

Remember that there are differences between a business checking account and a personal one. For one thing, business checking accounts are specifically and exclusively for business entities, so you’ll need to provide documentation proving your business exists to open one.

Additionally, business accounts are often subject to transaction limitations (or per-cost transactions over a certain monthly threshold), and their maintenance fees may not be as easy to waive.

Who is a business account checking for?

Business checking accounts are for business owners, including sole proprietors. If you have a structured business, like a limited liability company (LLC), S-corp, or C-corp, you should be able to open a business checking account using your EIN (employer identification number). If you’re a sole proprietor, you should be able to use your Social Security number instead.

Types of business bank accounts

Like personal accounts, you can choose from several types of business bank accounts, depending on your company’s needs.

Business checking accounts

Business checking accounts allow you to store, access, and use your business’s funds. You can receive payments, withdraw cash, and pay bills, staff, and vendors.

Business checking accounts should not be used for personal expenses, even if your business is a sole proprietorship. The whole point of having a business and personal checking account is to separate business and personal funds. To gain the benefits of separate checking accounts, it’s important to pay yourself and transfer those funds to your personal account.

Business savings accounts

Operating a separate business savings account can help improve your business’s finances. And many business savings accounts offer higher interest-earning potential than checking accounts while maintaining FDIC coverage.

Merchant accounts

If you plan to accept credit card payments, you’ll need a merchant account. This account is separate from your primary business checking account and may come with its own fees.

These days, many popular end-to-end merchant service platforms, like Square, provide a merchant account or merchant account functionality as part of their services. It’s also worth remembering that some banks may waive business checking account fees if you sign up for merchant services.

Business checking account vs. personal checking account

Here are a few of the most prominent differences between business and personal checking accounts.

Business checking account: Pros and cons

Like any other financial product, business checking accounts have drawbacks and benefits.

Benefits of a business checking account

Here’s a closer look at some of the main benefits of operating a business checking account.

Tax simplification

Gathering the information to file tax returns can be stressful, especially if you are a sole proprietor or small business. Keeping your business finances separate makes it substantially easier to see exactly how much you’re earning and how much goes toward expenses—and calculate how much you owe Uncle Sam.

Consider opening a separate business savings account to set aside your quarterly taxes. That way, you won’t accidentally spend the money on other things.

Makes for easier bookkeeping

Having a separate business checking account simplifies bookkeeping. Your business bank account will give you a bird’s eye view of your company’s financial comings and goings, which is much easier than trying to identify and separate relevant transactions from the chaos of your personal account.

Increasing business credibility—and credit

Having a business checking account can increase confidence among your clients and suppliers. When payments hit their account (or you offer your credentials on an invoice), they’ll see that you take your business seriously enough to separate it from your personal finances.

Additionally, a business checking account can help you build credit as a business entity, which is important if you ever want to take out a business loan or line of credit. Your business will eventually have its own credit score, and opening a business checking account is one of the first steps toward that goal.

Protecting your assets

While incorporating is an essential step toward protecting your business assets in case of a lawsuit (alongside taking out business insurance), separating your business’s finances adds another layer of protection for your personal assets.

What do I need to open a business checking account?

While every bank has specific requirements for opening a business checking account, here are some of the most common documents and information you may be required to have.

Employer identification number (EIN) / Social Security number

Your EIN is the unique identifier that makes your company recognizable to the IRS. Filing for an EIN is one of the first steps you’ll take after you incorporate your business. If you’re an unincorporated sole proprietor, you should be able to use your Social Security number instead.

Articles of incorporation or organization

Articles of incorporation or organization are used to establish your business as an entity in the state you’re doing business in. This document also proves to the bank that your business is real, so most require you to upload them as part of your business checking account application. Again, sole proprietors are excused from this requirement.

Authorized users’ Social Security numbers

Along with your EIN, all authorized signers (not just the business owner) must provide the bank with their Social Security Number.

Minimum initial deposit

Many business checking accounts require a minimum initial deposit, which you’ll need to have ready to go as soon as the account opens.

How to choose the right business banking option

With so many business checking accounts available, shopping for the right one can be challenging. Here are some highlights to remember when deciding which account is right for you and your business.

Consider any fees

Business checking accounts may come with monthly maintenance fees, additional per-transaction fees, cash deposit processing fees, lost debit card fees, and more. These expenses can add up over time and cut your profit margins, so it’s worth shopping for the most affordable option.

Choose a bank with the access and features you need

Access to fee-free ATMs will be critical if your business regularly uses cash. If you prefer to interact with a teller, you’ll want to choose a bank with brick-and-mortar locations. Consider what’s most important to you when shopping for your bank-to-be.

Consider interest-earning potential and introductory bonus offers

It’s always nice to make money just by having money—and if you choose an interest-bearing business checking account, you can do just that. Some banks may offer a special introductory cash-back bonus or other rewards if you deposit more than a certain minimum threshold.

Steps on how to open a business checking account

Opening a business checking account is easier than ever. Here’s what you’ll need to do.

Choose your financial provider

There are plenty of financial institutions to choose from. Narrow your choice using the points we’ve already covered. Many business owners prefer to do their personal and business banking in the same place, but choosing the bank with the lowest fees may be advantageous, even if it means going elsewhere.

Choose your business checking account

You’ll also need to decide which specific business checking account you want. Many banks offer several business checking accounts, which may have varying minimum daily balance requirements, transaction limitations, and fees.

You’ll typically pay more for additional services and fewer account restrictions. You need to decide if it’s worth paying more for the extras that are offered. Remember that you can always start small and upgrade later.

Follow the bank’s instructions

Once you’ve decided on your business checking account, follow the bank’s instructions to open the account. If you’re opening your account online, you’ll likely be able to upload the required documentation from home, though it may take a few business days for your account to be activated.

TIME Stamp: Business checking accounts can make running a business easier

Although it does take a few extra steps and adds another cost, opening a business checking account can make your life much easier. These accounts can go a long way toward legitimizing your business, simplifying bookkeeping, and protecting your assets. And these days, they can be opened online in minutes.

Frequently asked questions (FAQs)

Are business checking accounts FDIC insured?

Yes, a good business checking account will be covered by FDIC insurance. For incorporated business structures, this insurance is separate from personal funds held at the same institution, meaning up to $250,000 of personal funds and up to $250,000 of business funds will be covered.

Unincorporated sole proprietors get less protection. For them, the $250,000 maximum covers both business and personal funds at the same bank.

What is the best place to open a business checking account?

Banks constantly shift their account offerings, developing new features or lowering costs to become more competitive. Major financial institutions like U.S. Bank, Bank of America, and Wells Fargo offer business bank accounts, but smaller institutions and digital-first banks are also worth considering.

When should I open a business checking account?

The U.S. Small Business Administration recommends opening a business bank account when your business starts accepting or spending money. If you want to follow that advice, you should open the account before you receive or send payments or as soon as you become a business owner.