Welcome to part three of our series, Start an LLC with Me. If you missed it, in part one I walked you through how to start a Delaware LLC, step-by-step. In part two, we went over how to apply for an EIN number with the IRS.
Today we're heading on to the next step most LLC's take: opening a business bank account.
My partner and I had been making a small income from our side hustle for a few months. We knew that for tax purposes we needed to open a joint bank account and then take equal distributions from there to pay ourselves. Once we had our Articles of Formation and EIN number, we were ready to apply for a business checking account.
About LLC Draws and Distributions
Paying yourself from your LLC is often referred to as a draw or a distribution. When a single member LLC moves money from the LLC to their personal account, it’s called a draw. When it is a multiple member LLC, it’s referred to as a distribution.
It is up to the business owner to determine how to pay themselves. For instance, my partner and I typically do an ACH transfer from our business checking to our personal accounts when we receive a payout from our online business. Many business owners just write themselves a check. If the business has ongoing expenses that will be paid for with the business bank account, you may want to always leave a set amount in the account.
It's up to you as the business owner how you pay yourself. If you're unsure or need further guidance, we'd suggest talking to your accountant.
The first thing that startled me when applying for a business bank account was just that – that we needed to apply. Business checking accounts are not like personal checking accounts where you can just open one. The application process is more involved and selecting a bank requires more time and thought than for a personal account.
The application process for a business checking account generally only takes a few minutes, provided you have your documents ready to upload. The bank will review your application and this may take hours to days for them to complete.
Documents You Need to Open a Business Bank Account
The requirements for each bank differ but nearly all will require:
- A copy of your articles of incorporation or formation
- A copy of a government issued photo ID, such as a driver's license or passport
- An EIN number and possibly the letter from the IRS providing you with the EIN number
For more information about the documents you may need, check out our post on the documents you need to open a business bank account. We address some additional documentation that may be required if you are seeking funding.
Things to Consider Before Selecting a Bank for your Business
You'll find that every major bank offers business checking accounts. Additionally, there are online only options for business owners as well. When selecting a business bank account, it's important to consider your business needs. Here are some specifics to consider and prioritize:
- Monthly fees
- Transaction fees
- ATM availability and fees
- Minimum deposit
- Minimum balance
- Number of transactions you anticipate per month
- Need for cash deposits (access to brick and mortar location)
- Interest rate on deposits
- Additional tools and perks
Many banks waive the monthly fee amount if you maintain a certain balance or have direct deposits on a regular basis. Some offer multiple levels or types of business bank accounts with different perks and fees by usage.
Online Bank Accounts – Are they really a bank?
As I researched business bank accounts, one thing that I discovered was that many banks that market themselves as online bank accounts are actually technology companies, not banks. You can usually spot this when they refer to themselves as a “banking platform” or “financial technology company” rather than a bank, or by reading the fine print.
The banking platforms I researched were still FDIC insured and backed by a real bank – often a smaller community bank with very few branches.
For instance, Bluevine, one of the top-rated online banks, is actually a technology company and the bank behind it is Coastal Community Bank. Coastal Community Bank is based in western Washington and has just 14 locations.
Mercury, another popular online banking choice, provides banking services through Evolve Bank and Trust, a bank with six branches based primarily in Arkansas.
Though there are no obvious downsides to these offerings, it must be noted that your banking abilities depend on a continued partnership between the technology platform and a smaller bank.
Some banks may require that you come into a branch to show your ID in person before they’ll complete the application for the business bank account. Additionally, some banks require that you at least live in a region where they have branches available.
My partner and I learned this lesson the hard way. We initially applied for a business checking account with a bank that has physical locations where my partner lives, using my home address as our physical location. We were denied because I do not live in a region where the bank has a presence, even though my partner does. This requirement is not noted anywhere on their site.
Best Business Bank Accounts
I’ll come right out and say it – our number one priority when looking for a business checking account was that it was free. We’re a small business and we don’t have the steady income yet to meet some of the qualifications that many business checking accounts require to waive their monthly fees. We found there were quite a few options that would work for us, completely free.
To make our selection, my partner and I looked at the specifics listed above and considered our needs. Our business never handles physical cash nor would we need to make a cash deposit. We live on opposite sides of the country and will have few transactions per month. We needed a good app or online interface and an easy process for ACH transfers.
We reviewed the rankings lists at Nerdwallet, Investopedia, Bankrate, CNBC, and Money Under 30. Most have helpful pro/con lists that will quickly narrow down your list.
My partner and I wound up going with an online only banking platform and have had a great experience so far.
What works for you?
Are there many banking options for LLCs? Yes. But the best business bank account is the one that works for you. If you live close to your local credit union and have always had great service from them, they might be the best choice. Choose the business banking service that is most convenient for you and makes it easy to run your business.