One of the basics of running a business is to set up separate bank accounts to fulfill the business requirements. Some of the basic accounts that should be considered include the savings, checking, and certificate of deposit (CD) accounts. A lot of new business owners make the mistake of mingling their personal and business accounts.
They erroneously believe that processing their business transactions through their personal accounts is more convenient. Over the long term, things can become more complicated. There are many reasons not to mix personal with business banking. Among these are:
Tax Difficulties – once it’s time to declare the annual income and expenses, personal transactions will have to be separated from business transactions. It will take a lot of time, effort, and stress to sort everything out if you have combined your personal and business account.
Ineligible Deductions – government regulations stipulates that only businesses are eligible for operational expenses deductions. If you use personal bank accounts for business, you’ll have a hard time convincing them that certain expenses are really business-related.
Lack of Professionalism – if your clients have to write checks to you as opposed to your business name, it can convey the message that your business is merely a “hobby” or a part-time venture. Take your business seriously for your clients to take you seriously.
Opening an Account
Before you open a business bank account, comparing several banks and their services might be a good idea. That way, you can take advantage of the best rates in the market. Aside from the rates, look into the services and support offered. After the comparison, be prepared with the necessary documentations to open the account.
Depending on how you plan to start up your company, some banks might require the business plan and specific details about your business. Common requirements include the certificate of incorporation, identity check (driver’s license, passport, utility bills, etc.), and list of signatories who can sign company checks.
The checking account is a service provided by most financial institutions such as banks and credit unions. It allows businesses to deposit and withdraw funds from a federally-protected account. The specific terms of opening the checking account may be different from bank to bank but generally, banks require identification, certificate of incorporation, and the initial deposit. Almost all banks also require a maintaining balance for the checking account.
A checking account holder is given a supply of checks with routing and mailing information. If the checks are filled out correctly, it can be treated “as good as cash” and deposited to the recipient’s bank account. The owners of the checking account are responsible for tracking their available funds, although the bank will issue accounting statements as part of their routine.
The checks issued out by the business owner must represent the amount of money available in his checking account. Otherwise, he faces multiple fees and possible legal action. Most banks try to protect their account holders by notifying them if an overdraft occurrs. Overall though, checking accounts are an essential part of business.
As long as account holders maintains accurate records, the checking accounts provides an efficient way to pay the bills, pay employee salary, and track other business-related expenses. The savings account may generate more interest but the checking account has its own advantages. It eliminates the need to bring large amounts of cash to satisfy the payment of routine expenses such as rent, utility bills, and salary.
A lot of first-time entrepreneurs who already have a checking account don’t both with a savings account. However, if you have a significant amount of money sitting on the checking account, it’s probably worth your while to open a savings account. This is because it has higher interest payment; you receive higher yields on your money and therefore more income for your business.
Historically, it was easier to open a savings account in the same bank as the checking account. With the advent of internet banking, this is no longer a concern. It is easy to transfer money among various accounts in different banks.
Certificate of Deposit
Another important business account that should be considered is the certificate of deposit. It is a type of low-risk investment instrument that is offered by most banks and credit institutions. Certificate of deposits are similar to savings accounts in the sense that it both provides a stable return on your money. The main difference is that CDs provide better yields and require account holders to lock their accounts for a specific timeframe.
Business owners with cash lying around should consider investing their money into CDs. Aside from the fact that this instrument has Federal Deposit Insurance worth up to $100,000, there are also various types of CDs to suit individual requirements. For example, business owners can choose from variable rate CDs, high-yield CDs with “call” feature, and the classic long-term CDs.
As you can see, the banking needs of a business are vast and varied. Some business owners even open several checking accounts and savings accounts to satisfy the demands of their operations. The most important thing is to look at the actual business requirement and then set up a system of payment and deposits that is efficient and accurate.