By Carol H Cox
When there’s only you at the helm of your business, you essentially are the business. And it can be tempting to mix your personal funds with that of your business. If you’re starting off small, it might seem at first much easier to just to use your existing personal bank account to make business purchases and to make business deposits. Why bother with opening another bank account, right?
Well, after a few shipping expenses, supply purchases, website hosting fees, book purchases, website design fees, subscription fees, and so on, you’ll soon be spending lots of time keeping side records of what belongs to what.
Was that book you purchased last month a personal expenses or a business buy? What about that trip last week to the post office? Those Amazon purchases, were they all personal or some business, and which were which?
I think you understand what I’m getting at here. It is so much simpler to track your business financials if you start out with a clear dividing line between your personal affairs and your business affairs.
Three other really good reasons to separate your business banking:
- Your quarterly estimated taxes and annual income tax filings for your business will be much easier to do.
- Your financials will be more defensible if you’re ever audited by the IRS.
- Your business revenue, expense, asset, and liability numbers used in financial statements will have more integrity–essential if you’re applying for a loan or credit line someday.
Setting up a business checking account can help you achieve this separation. As a sole proprietor, there are many account options available. Some bank accounts are marketed as “free.” Usually, “free” refers to the financial institutions “no monthly maintenance fee” policy. But there are virtually always other fees involved somewhere.
Four common types of fees to watch out for:
- Monthly maintenance fees—unless the account holder maintains a required average monthly or daily account balance, this fee will often apply.
- Excess processing fees—which kick in once the monthly maximum number of account transactions has been exceeded.
- Per item processing fees for cash deposits—these apply once the monthly total dollar limit has been reached.
- Service fees—these are levied for such things as overdraft protection, insufficient funds, international transactions, cashier’s checks, printed statements, and out-of-network ATM usage.
The details are in the fine print and footnotes, so you’ll want to read them carefully and talk to customer service representatives before opening an account.
I’m not going to recommend any particular bank, because choosing one is very individualized to your business situation. But what I will provide is a way to evaluate which account characteristics are most relevant in your decision making process.
Asking and answering the following questions about your business will help you make the right choice for business banking services:
Question #1: Do you need access to physical bank branches, and do you want to talk to bank employees in person?
Look at the nature of your business and expected growth over the next few of years and consider whether these apply:
- You need to make cash deposits for your business.
- You have a strong preference to do some banking face-to-face, don’t want to handle all of your banking business by phone or over the Internet.
- You want to establish in-person banking relationships for obtaining future business loans or lines of credit.
If any of these are true, this suggests that you want to open an account at a brick-and-mortar (i.e., traditional) bank rather than an account at an online-only financial institution.
Of course, as you would expect, online-only bank accounts tend to have fewer fees or no fees (as is the case with Azlo online-only banking, although they do charge processing fees to merchants accepting Azlo debit card transactions)—with no branches and limited personnel their business expenses are lower.
But while you may save on fees, online-only banking may have fewer services available and you don’t get face-to-face interaction. For example, in the case of Azlo there are no checks available, no cash deposits allowed, and no option of multiple users on an account as of this writing.
Question #2: Does your business require 75, 150, 200 or more banking transactions a month?
Many banks have transaction limits, after which point transactions are no longer free. For example, at U.S. Bank, the Silver Business Checking account has a free transactions limit of 150 transactions per cycle, after that each transaction costs $.50. And at Axos Bank (an online-only bank) the Basic Business Checking account has no-fee transactions until the 200-transactions monthly ceiling is reached, and then it’s $.30 per item.
What’s a transaction? Well, that depends on the footnotes. It typically means any deposits and other increases or decreases to the account, such as checks paid, withdrawals, and fees.
Question #3: How much money do you want to leave in your business account each month?
Many banks require you to maintain a minimum average monthly balance or a minimum average daily balance in the account in order to have the monthly maintenance fee waived. There are also banks, like First Citizens Bank and U.S. Bank, that have no minimum balance requirement on their basic checking accounts as well as no monthly maintenance fee, but have relatively higher fees for transactions once transaction limits are exceeded.
Question #4: Do you need to make cash deposits—what’s the monthly sum?
There is usually a monthly cash deposit limit on basic business checking accounts. It could be something like $2,500, $5,000 or $7,500 a month. After hitting deposit limits, cash deposits may cost something like $.10 to $.30 per $100 deposited—it depends on the bank.
Question #5: How much of an initial deposit do you want to make?
This varies greatly among financial institutions. On the less expensive end, basic business checking accounts typically require something between zero to $100 to open (although the Axos Basic Business Checking account has a rather high $1,000 initial deposit requirement).
Question #6: Do you use business software, such as accounting or payment services, that you want to be link to your business bank account?
Many software services, like QuickBooks or Xero can link up with some bank accounts to import data for updating financial records. If this is important to you, find out whether the business bank account you’re considering can integrate with the software services you use. (Note: Some banks charge access fees related to using these services.)
The best business bank account for your sole proprietorship will depend on the nature of your financial transactions, monthly number of transactions, average total dollar cash deposits, and your need for additional services, like accounting software integration.
Below is a list of five basic business bank accounts that may work well for a sole proprietorship business:
Basic Business Checking (First Citizens Bank)
Simple Business Checking (Wells Fargo Bank)
Silver Business Checking (U.S. Bank)
Business bank account (Azlo, online-only banking)
Basic Business Checking (Axos, online-only banking)
Maintaining a wall between you personal and business financials is important, and a business bank account can help you do this. The trick is to minimize your fees and at the same time get the level of services that your business needs. Getting answers to the questions above will help you to select the best business bank account for your enterprise at a reasonable cost.
Comments: Do you have any additional experience with business bank accounts, positive or negative?