Starting an LLC can feel like the big step you’ve been waiting for. It officially separates you from your business in a way that you haven’t yet experienced due to Federal recognition of an LLC entity. However, while ideally you’re excited to start an LLC thinking that it’s almost all additional beneficial paperwork, the reality is that you’re about to become thrust into a whirlwind of paperwork that nobody warns you about until you’re in the middle of it – and it’s worse than the initial LLC filing documents. Choosing a business bank account will be one of the most critical decisions you’ll make after completing your LLC filing. That said, it’s more complicated than walking down the street to your local branch and opening up an account because that’s what you’ve had since you were a kid and you’re familiar with it.
It’s A Huge Mistake to Approach This Like a Personal Checking Account
Many new LLCs think of their business checking account like any other account they’ve ever opened. This means they approach their personal bank they’ve used for decades and determine that it will suffice for business, too. Maybe it does. But nine times out of ten, people find themselves frustrated months later when they have an account that just doesn’t fit what they need.
What truly matters? What a bank advertises as a highlight of their features isn’t applicable in reality. Sure, getting money for opening an account is nice, but when you’re processing 50 deposits a month and only 20 are included in the fee charge, those transaction charges will kill you after a little while. What matters is enough monthly transactions included (or no limit), deposit limitations (especially if you deal in checks or cash) and compatibility when it comes time for taxes and accounting software to monitor expenses and income.
The Difference Between Traditional Banks and Online Banks in the 21st Century
Traditional banks have improved their digital offerings in years past – but even with this, the results are still questionable when it comes down to processing your monthly transactions – or lack thereof – for small businesses.
If you’re using QuickBooks or any other software to monitor expenses, for example, you’ll want your debits and credits to automatically flow into the software. Manually doing so grows old quick and it’s how mistakes occur. Thus, when evaluating who to go with where checking is concerned, it’s worth researching the best business account features that ensure practicality based on daily LLC operations – oftentimes dealing with transaction volume and accounting software capabilities.
The Additional Costs That Accumulate Faster Than Expected
Monthly fees are just the start. Small businesses start building additional fees off of things that banks don’t make apparent. For example, wire transfers. Are you paying contractors? Are vendors requesting a wire? It could be a normal occurrence where you’re sending wires from time to time. At $25-$30 per outgoing wire, that’s going to hurt.
Are you managing cash deposits? Depending on your business’ needs (and many LLC service-based entities have more than you’d think), you may need the option for cash deposits and who knows if banks charge based off of percentages after a certain amount? Even worse – some online banks don’t process cash very well at all which could prove detrimental should your business model rely heavily on cash.
Overdraft fees and returned item fees could also add up. The problem is that at the beginning of an entity’s life, cash flow lacks stability. This means any sort of cushion makes more sense than what people realistically appreciate – but that’s not given up-front. Additionally, overdraft protection isn’t guaranteed although it’s essential during a formation period.
The Importance of Truly Separating Business and Personal
For single-member LLC owners, sometimes it’s enough operating your LLC as-is since technically the IRS allows income or expenses deposited through a personal account – however, this is one of those times when it’s relevant what they allow since it’s not necessarily practical.
The IRS notes commingled funds as potential concerns that your single-member LLC isn’t an entity distinct from you as a person – should the IRS ever audit your company or you end up in court, commingled information makes it extremely difficult to prove that your LLC is separate from you personally since that’s the whole point of creating an entity.
Beyond this reality, separating makes things easier! Tax time won’t be a nightmare since each side is clearly defined – you aren’t scrolling through months of grocery runs just to determine one accidental bank service fee purchase on behalf of your LLC and it’s easier to see whether or not your business is actually functioning if those numbers aren’t confused with your grocery store receipts, too.
Choosing Between Online/Traditional Banks For Your LLC
It’s evolved over the past few years from having online banks present clearer options for most small businesses due to overall lower fees and better digital experiences – but that’s narrowed down because traditional banks remain slower and expensive and stuck in yesteryear.
The gap has closed slightly since there’s now more competition between the two entities but many differences still matter.
Online banks offer better – or no – monthly fees, higher transaction capabilities and better software integration. These options cater to anyone comfortable doing everything digitally. The downfall? Limited face-to-face services. If cash deposits are a necessity, they’ve got limited options – even opening an account may prove challenging without being able to meet someone in person (more on this later).
Traditional banks offer brick-and-mortar locations for local business relations – but this usually comes with higher fees, lower transaction options, and clunky digital entry systems that rely on old-school methods with no one behind the screen answering questions in real time – but their lines of credit are more easily accessible down-the-road for any changing world situations.
While assessing needs should be at the forefront for what’s best when you feel comfortable choosing business banking options, reality is that if you’re primarily digital then online banking makes more sense for small businesses but if you’re retail-based, handle large quantities of cash or appreciate having a banker nearby you can talk to in-person, then it might be worth the extra fees.
Expect A Paperwork Nightmare
A business bank account requires more paperwork than anticipated. You need your new LLC paperwork, an EIN (employment identification number) created through the IRS along with documentation that you are allowed to open accounts on behalf of the new LLC.
Some banks require operating agreements – even if you’re single-member – which may not be on the fast-track request as other banks will want direct business licenses or permits as well.
Paperwork is rarely disclosed up-front so make sure to call ahead to find out what’s necessary before applying or showing up in-person because processing times also differ.
As an online bank, it might take a few days at most; traditional banks may take longer than a week – and with additional questions about your documents over the phone more often than not – get used to factoring this into your launch date so you can open up your business without a hitch so you can accept payments or pay vendors!
What Matters When Starting Out – And Apply
For anyone who’s overwhelmed by possibilities, practicality comes first – determine what your needs will be met given how many deposits/transactions you’ll realistically have each month? Will you be handling cash? What’s your accounting software?
Then look for three-to-five banks that make sense with competitors afterward looking into fees based on expected use – it’s important not to give too much stock into low fees; it’s worth focusing on base fee access (if reasonable) as opposed to free accounts with base issues just as a free account with monthly $15-plus-fees could make more sense for transactions – after all, even though .50 cents adds up at 100 transactions in one month compared to $0 additional charges in another!
What’s Other Business Owners Using In Your Industry?
Usually there’s a reason why something is popular; finally read through terms and conditions regarding anything extra ultimately charged because that’s where things hide.
Now – you don’t have to stay with this option forever! Unfortunately, however, it seems people attach themselves forever making them feel like they need to put all their eggs in one basket!
Many companies realize they no longer like their first choice and switch. It’s annoying but it’s doable if fees and quality aren’t as decent as expected. Do not let “I’ll switch eventually” stop you from getting opened because before money can be transacted, your LLC must have its own business account vs commingled accounts because it’s complicated!
Pick what’s best now knowing it can easily adjust later if things aren’t ideal. But the only time it’s unacceptable is by combining finances for business with personal accounts solely because someone’s stressed out!
