Does a single member llc need a separate bank account

If you are setting up a new limited liability company (LLC), you may be wondering whether or not you need a separate bank account for it. After all, 27% of small business owners use the same account for personal and business finances1, and 46% use personal credit cards for business purposes2.

For many entrepreneurs – particularly sole proprietors – opening a separate bank account may seem like a hassle worth putting off or even avoiding altogether. But is this possible with a limited liability company? And how do you go about opening a bank account for an LLC? All these and more in this article.

Key takeaways

• An LLC needs its own bank account to separate business finances from the personal finances of shareholders.
• A dedicated LLC bank account ensures liability protection, easier financial management, and simplicity when filing tax returns.
• The three essential types of accounts for LLCs are checking, tax and profit accounts.
• When opening an LLC account, banks typically ask for a copy of your company’s articles of organization, its employer identification number (EIN), and a copy of the LLC operating agreement.
• To open a bank account for your LLC, start by finding the right bank, then gather the necessary documentation, and finally submit your application.

Does an LLC need its own bank account?

There’s no state or federal law that explicitly requires a limited liability company to have a separate business bank account3. However, you’re legally required to open one for your business if either of the following is true4:

• The business is a separate legal entity.
• You operate the business under a doing business as (DBA) name.

Since an LLC (whether multi-member or single-member LLC) is a distinct legal entity from its owners, it follows that you must open a dedicated business checking account for it. So yes, a limited liability company needs its own bank account on account of incorporation.

This is different from sole proprietorships and partnerships, which are not separate legal entities from their owners. In both these business structures, you would only be legally obligated to open a separate bank account for your company if it operates under a DBA.

Besides being an indirect legal requirement, setting up a business bank account for LLC comes with numerous advantages that may benefit business owners.

• Easier financial management: having a dedicated business checking account gives you a single place for handling business expenses, bills, and customer payments. It not only keeps your business finances and transactions neatly organized in a single account, but it also ensures they don’t get mixed up with personal finances. This is great for bookkeeping and accounting purposes.
• Improved relationship with your bank: financial institutions generally require that LLCs open and maintain independent accounts in the name of the business and using company tax ID. Doing so gives your company a professional outlook and increases the chances of getting approved for loans, lines of credit and business credit cards. In fact, many lenders are often hesitant to extend business loans to sole proprietors5 because the business is inseparable from the owner, which increases risk from the lender’s point of view.
• Liability protection: an LLC offers liability protection for personal assets. This means creditors can’t seize your personal assets to recoup business debts. Having a separate bank account for the business adds another layer of protection since you won’t have personal finances mixed up with business finances in the same account.
• Easier filing of tax returns: as an LLC owner, you will file your taxes on your personal Form 1040. If you mix business and personal finances, you will have a hard time figuring out which transactions relate to your business and which ones relate to you individually. This not only makes it harder to file tax returns, but it may also increase the risk of errors.

The bottom line is: if you have a limited liability company, you stand to gain more in having a dedicated account for it and maintaining a personal bank account for your own finances.

What type of bank account should an LLC have?

Although there are no specific requirements regarding the types of bank accounts that an LLC should have, it’s usually a good idea to maintain at least three accounts: a checking account, a tax account, and a profit account.

Checking account

Your business checking account is essentially your operating account. This is where you manage the daily operations of the business. The account runs cash inflows and outflows. These include customer payments, non-sale incomes, payable bills, and purchases. An example of a business checking account is the BlueVine Business Checking. With unlimited transactions and no monthly maintenance fees, this online banking account allows you to receive as many payments as possible and also pay for purchases and bills without incurring any monthly fees. If you prefer a more traditional bank, then the Chase Business Complete Banking account is an option too.

Tax account

This is where you put aside money for paying business taxes. By separating this account from the rest, you will ensure that you have money to go towards your company’s tax obligation. A good rule of thumb is to set aside 30% of your earnings for tax. One account that you can look at when opening a business tax account is the Bank of America Business Advantage Fundamentals Banking. It offers up to $7,500 in fee-free cash deposits each month.

Profit account

The final account that you may need to open for your LLC is a profit account. This account holds the earnings that your business makes. You can use this cash to buy new business assets, pay dividends, or reinvest in growth. Because of its uses, a profit account can double up as a business savings account. Ideally, you will want it to be a high-yield account that can earn decent interest. With that in mind, the Capital One 360 Performance Savings Account is worth a second look for small business owners because it has no fees.

Beyond the three above, there are more types of business bank accounts to choose from. You will need to do some research to find out which one suits your business needs. That will include choosing a bank whose terms are agreeable to you. Many traditional and online banking institutions set their own service options and fees structures for various types of accounts.

For example, some have minimum deposit and minimum daily balance requirements. There are banks that charge ATM fees while others offer this service for free. Ideally, a good bank for small business owners should have the lowest monthly service fee. Otherwise banking charges may eat into your business’s cash flow.

You will also need to decide on things like availability of checks, overdraft protection, number of withdrawals per month, support for ACH withdrawals, mobile app support, whether or not you get a business debit card together with your account, and if the account integrates with merchant services. Answering such questions will help you determine the best type of account for your business.

For instance, if you are looking for an account that has unlimited withdrawals, then it would make sense to open a checking account. On the other hand, if you don’t mind making a maximum of six withdrawals per month, then you may use a business savings account. Similarly, if you are a retailer who frequently receives payments via PayPal, then integration with merchant services will be an important factor.

Once you’ve figured out the type(s) of account you need, you can then decide on the most suitable bank to approach. Your options are almost endless in that regard. Besides brick-and-mortar banks like Bank of America, Capital One, and Wells Fargo, you can opt for an online bank like Nearside. Credit unions, too, are well-worth your consideration because they offer banking services in the same way that brick and mortar banks do.

Being a startup and possibly inexperienced LLC, some banks may try to sell you a bigger account than your business needs. Such accounts typically come with unfriendly terms and high monthly maintenance fees. Make sure to read the fine print of each account so that you don’t fall for the hype. Whenever you feel unsure, choose a basic business account that you can upgrade later.

Requirements to open a business bank account

Once you’ve chosen a bank and the type of account you want for your LLC, the next step is filling out the paperwork to open the account. Banks have different requirements for documentation. Therefore, consider making a call and asking them to list for you the type of documentation you’ll need to avail. Generally, here are the most common documents that banks often request for before opening a business bank account for LLC:

• A copy of your company’s articles of organization or certificate of formation. They are basically the same document, but called different names in different states. If you hired the services of a registered agent or organizer during the formation of your LLC, chances are that organizer is the one who filed articles of organization on your behalf. The bank may require that you avail a copy of the resignation resolution. This effectively removes the organizer as an authorized signer of the account and replaces him/her with the real shareholders of the LLC. 
• Your company’s employer identification number (EIN). Also known as a federal taxpayer identification number, an EIN is the business equivalent of a Social Security Number (SSN). This nine-digit number is typically used by the IRS to identify businesses for tax purposes. Banks, credit unions and other financial institutions also require the employer identification number when opening a bank account for an LLC. For an unincorporated business (like a sole proprietorship or partnership), your Social Security Number may serve the purpose.
• Documentation that shows who is the authorized signatory of your company. This document may be an LLC operating agreement or its equivalent. Whatever the case, it basically tells the bank who is authorized to draw on the LLC’s account. If your company has several shareholders, the bank will require all of them to be present when the account is opened.

As mentioned, the exact requirements for opening a bank account for an LLC will vary from one institution to another. Therefore, make sure to call your bank first and ask them whether they need additional documentation. If your LLC is not yet registered already, you will need to register it yourself or use a tool like Sprout to help you do it faster.

How to open a business bank account for an LLC

Although setting up a business bank account for LLC isn’t as easy as opening a personal bank account, it’s still a pretty straightforward process that you can complete in three steps as follows:

Step 1. Find a bank that meets your business needs

Not all banks are created equal. Some offer fee-free accounts while others have extremely high monthly service fees. There are banks that scrap ATM fees while others charge exorbitantly to discourage withdrawals. Ultimately, a good bank or credit union for your LLC is one that provides the type of account you need, yet still offers affordable banking services coupled with perks that your business can use. It should also be a member FDIC that can keep your money safe and insured.

Many of these banks and credit unions often publish their service options online. Besides, there are lots of reputable websites that review and rank financial institutions based on their services. To find out what to expect from each bank, start with a simple Google search of “the best bank for LLC”. This will pull results that you can use to compare multiple banks.

Alternatively, consider visiting branch locations of brick-and-mortar banks (and credit unions) in your area to see what kind of services and fees structures they have. Remember to compare things like the types of accounts on offer, overdraft protection, minimum deposit, minimum balance requirements, types of LLC loans available, interest rates on those loans, business debit cards that you can obtain, options for mobile banking, support for wire transfers, and whether they have business credit cards for account holders.

Step 2. Gather the necessary documentation

Once you’ve identified a bank that fits your LLC’s needs, give them a call and find out what they’ll require from you before opening an account. This will mostly involve documentation and a minimum deposit (or initial deposit).

As mentioned in the previous section, the most common documents when opening a bank account for an LLC are:

• A copy of your company’s articles of organization or certificate of formation.
• The LLC’s employer identification number (EIN).
• Documentation that confirms the authorized signatories of the LLC.

If you have a doing business as (DBA) or fictitious name, you may also need to provide it to the bank. This is only necessary if you operate under a fictitious business name. Some banks will also ask for personal details of the shareholders. This includes their government-issued IDs, driver’s license, contact information, mailing addresses, and Social Security Numbers. Depending on the industry you are in, the bank might also ask you to provide copies of your LLC business licenses and permits.

Step 3. Submit application

The actual application phase involves filling out forms and submitting them to the bank, along with the necessary documentation. For a multi-member LLC, all the shareholders will need to be present and provide their signatures for the account to be opened. Once that’s done, your company will have its own business account.

Some banks will offer you a business credit card along with your LLC account. It may be a good idea to take the credit card. In addition to helping you pay for company purchases, a credit card establishes your business’s credit score, independent from your personal FICO score. This may prove invaluable when you need the LLC to qualify for loans, lines of credit and other facilities solely based on its creditworthiness.

References

1. Shubhomita Bose. “27 Percent of Small Business Owners Use Same Bank Account for Business and Personal (Infographic).” Small Business Trends, 14 Mar. 2017, https://smallbiztrends.com/2017/03/same-bank-account-for-business-and-personal.html
2. Marco Carbajo. “10 Stats That Explain Why Business Credit is Important for Small Business.” sba.gov, 10 Mar. 2017, https://www.sba.gov/blog/10-stats-explain-why-business-credit-important-small-business
3. Jason D. Knott. “Do I Need a Bank Account for my LLC? – What Are The Rules?” 10 Feb. 2021, https://www.lawofficesofjasonknott.com/do-i-need-a-bank-account-for-my-llc/
4. Amanda Cameron. “Do I Need to Open a Business Bank Account?” (Asks Business Owners Everywhere).” Patriot Software, 29 Jul. 2021, https://www.patriotsoftware.com/blog/accounting/do-need-separate-business-bank-account/
5. Lydia Roth. “4 Types of Businesses That Typically Don’t Qualify for Bank Loans & Why.” Nav, 20 Oct. 2020, https://www.nav.com/blog/4-types-of-businesses-that-typically-dont-qualify-for-bank-loans-why-1487/