Limited liability companies (LLCs) are a hybrid legal entity that offer small businesses two attractive benefits: pass-through taxation and limited liability. Someone who wants to grow their company without access to startup capital can use business losses to offset the taxes on other income—an attractive option when you are first starting out. At the same time, the LLC is treated as a separate legal entity, and your personal assets are safe should someone decide to sue the company.
This flexibility is what makes LLCs such a popular business structure. However, in order to retain the limited liability feature, you have to perform due diligence in order to keep business profits and losses separate. Because the LLC's taxes are handled on your personal Form 1040, keeping careful track of purchases and payments will make your own bookkeeping much simpler as well, encouraging you not to use your emergency fund to cover an unexpected supply bill.
One of the best ways to maintain this degree of separation between your personal finances and your business profits and losses is to open a separate bank account for the LLC. Note that this is not a legal requirement, but the IRS needs to be able to see that you have kept your personal assets out of the business; otherwise, you could lose your limited liability. The business account is a great way to do that.
All business expenses will be paid from that account, and you will receive all profits from the business to that same account. If you opt to get a credit card in the LLC's name, everything you charge to that card must be a legitimate business expense.
As soon as you take these steps, you can begin to establish a credit profile for your business. This will make it easier for you to apply for a business loan or receive trade credit in the future.
Fortunately, it is not hard to get started. Here are the steps you need to take in order to open a business bank account for your LLC.
All banks are definitely not created equal. Some charge more fees than others, and some might require your business account to maintain a minimum monthly balance. Some banks offer general overdraft protection; others dangle flashy plans in front of business owners, hoping they will not bother to read the fine print.
A good place to start getting information about which bank to use is a simple Google search, such as "best banks for LLC." A number of websites routinely rank and update lists of the best banks for small business accounts.
Here are some of the things you should consider when engaged in this preliminary search:
While you could end up finding a bank online—and there are some good choices for those able to handle business transactions remotely—you might decide that you would rather bank in the same community where you do business, choosing a smaller local bank or credit union instead of one of the big players. In that case, the preliminary online search is a great way to find out what services and fee structures are available from the big transnational banks, ensuring you can ask the right questions.
The next step for those looking to bank locally is to follow up with phone calls to area banks and credit unions, finding out what charges they have for business accounts and whether they offer the perks you want.
Once you have selected the bank you want to open your LLC's business account with, you need to set up an appointment to fill out the paperwork that will finalize the transaction.
Since banks differ in the kind of documentation they require, the best thing to do is ask the manager exactly what forms and documentation they need to see before you go to the meeting.
Not all bank representatives understand the ins and outs of signing on a new LLC account. You could be asked to provide unnecessary information, such as your company's DBA ("doing business as") name. Since the LLC operates under its own name, you will not need a fictitious name or trade name.
If you have a DBA, of course, you will need to bring the paperwork approving it with you.
Here are some of the most common documents related to your LLC that the bank will ask to see:
Depending on the state in which you formed the LLC, this seminal document goes either by "articles of organization" or "certificate of formation." Either way, you will need to bring a copy of this document along.
If the articles of organization were filed by an organizer rather than one of the LLC members, you will need to bring a copy of the resignation resolution along with you. That document's purpose is to remove the organizer, who plays no role in the day-to-day operations of the company, and name the actual members of the company.
Single-member LLCs, in which the owner acts as manager, director, and maintenance department (i.e. businesses in which there are no other employees), do not need an EIN. Typically, you need an EIN if your LLC has employees, withholds certain taxes on income, and is involved with some organizations specified by the IRS.
If you are a sole proprietorship that has recently become an LLC, your Social Security Number will probably suffice, and some banks will recommend you use the Social Security Number. Other banks might insist that you use an EIN.
You should check the bank's requirements before you agree to open an account with them. This is also a good time to reconsider whether or not to add an extra level of security and privacy for your LLC by getting an EIN even if you are not required to have one.
The operating agreement is essential if your LLC has more than one member. This document will let the bank know who has permission to draw on the account for funds with their signature.
If there are several members in your LLC, generally they will all need to be present when you open the account.
Some banks will offer a business credit card. Even if you do not end up accepting the card from them, now is a good time to consider having a dedicated card for your LLC.
The card allows your business to establish its own creditworthiness separate from yours. That way, you can eventually take out business loans without needing to use your personal assets as collateral—something that increases the amount for which you can be held liable. Ultimately, the more your business develops financial independence, the less liable you will be.
When you open a separate account for your LLC and link a business credit card to that account, you are developing a business credit score just like your own individual FICO score. This score numerically represents your company's creditworthiness.
Unlike a personal FICO score, which ranges from 300 to 850, business credit scores range from zero to 100. Different bureaus report the score—the same as with a personal FICO score—but there is no standard algorithm used to determine a business' creditworthiness, and each credit bureau will arrive at the score differently.
Nor can you just see a business credit score the way you are able to see your FICO score, which many credit card companies provide and update for free to their clients each month. You have to pay to see your business' credit report, ordering it from either Dun & Bradstreet, Experian, or Equifax—the three major business credit bureaus.
Obviously, the purpose of business credit is to let you grow your company. Once the company has established the proper creditworthiness, you can apply for business loans or lines of credit without using your own personal assets as collateral. Credit cards offer lower interest than other sources of quick funding, such as unsecured loans from the small business lenders you see advertised on the internet. They can really help a new business through a short-term credit crunch.
For a sole proprietorship that has just converted to an LLC, building independent credit is the best way to take advantage of the limited liability feature of an LLC. Sole proprietors often co-mingle their business and personal assets when they take out a business loan, using their personal assets as collateral. Having your business develop its own creditworthiness makes it possible to avoid involving your personal assets in the future.
The advantage of having an excellent business credit score is similar to having an excellent personal score: you will qualify for loans at a better rate, which could save you thousands of dollars over the long haul. You might also find that you qualify for lower rates on insurance policies and receive more favorable banking terms.
You do not need an EIN to apply for a business credit card if you are a single-member LLC who used a Social Security Number to get a business bank account. However, this could be a good time to assess whether you want the added privacy and security of an EIN. For optimum separation between your personal assets and those of the company, the best practice is to have an EIN for your business.
Choosing a business credit card is not very different from choosing a personal credit card. Any simple Google search will show you "the best" credit cards for a given year, like this recent article in U.S. News and World Report. It depends on what perks you think will benefit your business and its members the most.
You can find business credit cards for your LLC with no annual fee, which is a good way to cut expenses when you are getting your company off the ground. There are also cards that offer airline miles, cash back, and flexible bonus spending. As with credit cards for personal use, there are usually a number of special offers, including low interest rates and introductory cash or miles.
Some banks may take advantage of your status as a new business owner, using it as an opportunity to sell you a bigger or fancier account than you need with special checks. Do not fall for the hype. For your first business account, select normal sized checks, with numbers that start higher than zero, so you look established.
It may be best to select a basic account—you can always upgrade later. For now, keep the money invested in the business.
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