Many new entrepreneurs and founders question whether they really need to open a bank account solely for their new ventures. In short, the answer is a resounding yes. Here, we outline a few key reasons why setting up a separate business bank account can keep your company’s finances secure while making sure your personal assets are safe.
Why Keep Them Separated?
In deciding whether you need a bank account for your business, think about the reason why you would set up a business at all: To keep your personal and business identities separate for legal, financial, and taxation reasons.
On a practical level, this means keeping your business and personal assets separate so that in the event someone sues your company, your personal assets will be shielded from a judgment. In the legal world, this separation between the business and the founder him or herself is referred to as “the corporate veil.”
When lawyers discuss “the corporate veil,” it’s easy to miss the real-world impact of this protection. Imagine that a third party sues your new entity and wins – let’s say it is a bank trying to collect on your company credit card. The bank may use the judicial process to collect that money in a variety of ways, from forcing you to transfer cash to it or by selling your assets in order to generate liquid funds.
If your company does not have enough cash or assets to satisfy the full amount of the bank’s judgment, then the bank can – and likely will – turn to your personal assets. That is, the sheriff can show up to reclaim your car, put a lien on your home, or withdraw funds from your personal bank account.
Fortunately, there is a way to protect yourself from this nightmare scenario. This is where the corporate veil comes in. The law sets forth several ways to create a corporate veil to protect your business assets – for instance, making sure to follow corporate formalities in running your business. A critical way to create a protective corporate veil, however, is to keep your business and personal assets separate. Arguably, the most unambiguous way to do this is to create a separate account for your business funds.
This matters because a common way for parties to “pierce the corporate veil” is to demonstrate that companies are operating as though they are not, in fact, separate and distinct from the people who own and run them. If you use your personal checking account to cut business checks and deposit client funds into your personal account to pay down your personal bills, you will face an uphill battle in trying to argue that you and your business are, in fact, separate entities.
Keeping the Corporate Veil Intact
In general, business owners have the benefit of the corporate veil to protect their personal assets from business risks, unless there is a good reason to remove that protection. To ensure that you can keep that protection well intact, take the following steps:
- Set up a separate bank account for your company through your financial institution of choice.
- Commit to using that account ONLY for business purposes.
- Commit to using your personal bank accounts ONLY for your personal financial transactions.
- Only transfer money between your corporate and personal accounts if you are following the proper corporate formalities required for doing so. If you aren’t sure what these formalities are, consult your lawyer or accountant.
- Keep detailed records of all your business expenses, revenue, and recurring expenditures.
- If you are unsure of how to handle your business taxes vis a vis your personal ones, hire an accountant experienced in working with startups and small business owners.
Legal formalities aside, maintaining a separate account has numerous other benefits. Keeping separate accounts for personal and business items makes your accounting and bookkeeping practices simple and streamlined. Not only does it save you from parsing your various personal and business expenditures, but it also helps ensure you have included all of your deductible business purchases in your accounting system. If you don’t do this, it can be easy to miss many line items that can help you come tax time.
When you keep your business and personal transactions separate, you will have a clean record to present your preparer at the end of the year. Make sure that you keep your invoices and receipts should you need to furnish proof of particular expenditures.
How Do I Set Up A Business Bank Account?
Fortunately, it is relatively easy to set up a business bank account.
Gather your documentation.
At a minimum, you will need to provide your institution a copy of your filed Articles of Incorporation (for corporations) or Articles of Organization (for LLCs). You will also need to prove your IRS Employer Identification Number or EIN.
Watch out for hidden fees and costs.
When selecting a type of account to use, make sure you confirm whether there is an initial or ongoing minimum deposit requirement. Additionally, read the fine print on monthly fees and charges. When starting a new business, it is important not to be suddenly hit with unexpected fees or charges.
Ask about benefits.
Finally, make sure you ask your representative at your bank about any perks or features, like ways to automatically sort your deposits, how to set up online bill pay, and whether there are any rewards for opening a business credit card with that bank.
Contact Our Experienced Business Law Attorneys
Starting a business is a thrilling endeavor. However, failing to abide by the proper legal and corporate formalities can land you in trouble. At Wilson Ratledge, we assist business founders in taking steps that keep their businesses – and their personal assets –secure and sound with an eye toward protecting them from avoidable legal pitfalls. For assistance setting up your business account, or for questions regarding your entity, contact one of our experienced North Carolina business attorneys today at 919-787-7711 or via our contact form below.