One of the initial steps you may take upon becoming a small business proprietor is establishing a business bank account. Maintaining a business checking account separate from your personal account when applying for business loans or a line of credit can facilitate organizing your taxes and safeguarding your personal assets.
Most banks will request that you provide an EIN to initiate your application. It is important to note that, in general, it is not possible to establish a business bank account solely with your EIN. Although not all banks have identical requirements, you have to submit additional documentation to demonstrate that your business was established legally and is in compliance with state and federal laws.
If you are a business owner opening a new bank account, this article will provide you with the definition of an EIN, its purpose, and the additional documents required to establish a new account.
Key Takeaways
- Generally, businesses need an EIN to open a business bank account.
- Sole proprietors and single-member LLCs without employees may use their Social Security Number (SSN) instead of an EIN.
- Even sole proprietors may be asked to provide an EIN by most banks.
What is an EIN?
An Employer Identification Number (EIN), or Federal Tax Identification Number, is a nine-digit number issued by the Internal Revenue Service (IRS) to identify businesses for tax reporting purposes.
Importance of an EIN for your Business
The Employer Identification Number (EIN) is a unique number that the IRS assigns to your business, making it identifiable for tax purposes, even if you don’t have any employees. This number is needed to operate a business and to be a responsible taxpayer.
An Employer Identification Number (EIN) offers numerous advantages. The primary advantage is that this distinct tax identification number allows you to differentiate between your personal and business finances. Furthermore, you need an EIN to pay taxes, hire employees, and build business credit. It may also be required by law, depending on how your business is set up.
How to Obtain your EIN
So, if you are someone who needs to obtain your EIN, here are the simple steps that can help you get one:
- Visit the IRS website: Go to the IRS official website to get an EIN and follow the provided application instructions.
- Collect your documents: The applicant is required to furnish the following: a genuine taxpayer identification number, a business address, a mailing address, the business name, and the date of its formation. Additionally, you will be asked to reveal the business structure you have adopted; hence, it is necessary to research these alternatives in advance.
- Complete the application: You can apply for an EIN directly on the IRS website. In the application, you are requested to mention the reason why you need an EIN.
- Save your EIN: Your EIN will be provided to you immediately; however, you must retain it for future reference.
Is an EIN Required to Open a Business Bank Account?
Your EIN is a very important part of the application process. It is a specific code for your company that allows the IRS to identify you when you file your business taxes. Moreover, having an EIN helps as a sign that your business is operational and formally exists. It is also the paper that banks require when you open your business bank account.
Still, in some cases, a business account can be opened without an EIN. For example, single-member LLCs and sole proprietorships with no employees are not required to get an EIN. Nevertheless, the criteria for business accounts vary between banks, and some may impose an EIN requirement that is independent of the business structure. Always confirm specific requirements with your bank.
Can you open a business bank account with only EIN?
No, it is not possible to establish a business bank account solely with an EIN.
Banks are interested in verifying your identity and confirming the legitimacy of your business. This verification process is not limited to your business’ EIN.
What documents are needed for a business account aside from the EIN?
To open a business bank account, you have to present personal and business identification documents to your future bank.
Banks want to make sure your business is legitimate. They also want to ensure that you have the legal right to open a business bank account and that you can make financial decisions for your company.
To confirm your identity, you must present a valid form of identification, such as a state-issued driver’s license or passport. Similarly, your business license will be requested when verifying your business’s identity.
- If you have a DBA (doing business as), you will be asked for the certificate for that name.
- LLCs are required to submit articles of organization. They will also ask for your company’s operating agreement. The operating agreement is a document that outlines your company’s internal rules and operational procedures.
- LLPs must provide evidence of a partnership agreement, including the signatures and names of all other collaborators. Information regarding the management structure, profit shares, and partners’ rights may also be necessary.
- Sole proprietors must probably submit their Social Security Number (SSN) and address verification.
Your bank may necessitate an initial deposit in addition to these documents. The initial deposits and minimal balances are subject to change based on the type of business and different banks. Consequently, it is crucial to ensure that the bank you choose has a minimum balance and initial deposit that are both feasible to sustain.
Steps to open a business bank account with your EIN
A business bank account can help your business manage your finances and offer additional legal protection for your assets. If you are prepared to establish a business bank account, follow the instructions below to proceed.
Check out business bank account options
You will rapidly realize that business bank account alternatives are abundant. It is important to search for specific bank options based on your needs.
Some factors to consider are the availability of customer support, the fees associated with business bank accounts, the online banking feature, the variety of accounts available, and any additional benefits. In an ideal scenario, you will identify a bank account that establishes the appropriate equilibrium between fees and features for your business.
Collect your documents
After selecting the appropriate business bank account for your needs, you must prepare the necessary documentation for the application.
Most institutions require your full legal name, physical address, email, phone number, and EIN. Your business structure may necessitate additional information. For instance, partnerships may be required to submit a partnership agreement, whereas an LLC may be required to submit articles of incorporation, as mentioned earlier.
Visit the bank (or apply online)
Your application may require online or in-person completion, depending on your selected financial institution.
Approval may be granted within minutes or days. If your application gets rejected or denied further, you can ask the bank why. You may employ this information to improve a future application for a business bank account.
Upon the account’s opening, you may commence conducting commercial transactions immediately.
The Impact of Not Having an EIN: A Real-World Example
Understanding the impact of not having an EIN with an example will be quite simple and easy. Considering John, an LLC owner, faced issues because he didn’t have an EIN:
- Banking: Couldn’t open a business bank account.
- Hiring: Couldn’t legally hire employees.
- Loan Applications: Denied business loans.
- Tax Time: Faced delays and complications.
- Reputation: Struggled to build business credibility.
Similarly, a small catering business in New York operated as a sole proprietorship without an EIN. The owner, Maria, initially used her personal bank account for transactions. When she applied for a small business loan, the lender rejected her application because she lacked a separate business bank account—something that required an EIN. This setback delayed her expansion plans by months until she obtained an EIN and restructured her finances properly.
FAQs on Opening a Business Account with EIN
Here are answers to some of the most common questions about establishing a business bank account.
Why do you need a business account?
A business account differentiates your money from your enterprise transactions. It is helpful in recording expenses, controlling cash flow, and establishing a trustworthy relationship with customers and suppliers.
Can I add an EIN to my business bank account later?
Yes, in most cases. If you opened the account originally with your SSN, you are usually allowed to update it with an EIN once you have one. Your bank will be able to provide you with the exact procedure.
Can I get an EIN if I don’t have employees?
Even without employees, a sole proprietor or single-member LLC can get an EIN to help with recordkeeping, credit-building, and separating personal and business finances.
Can my bank require an EIN if it’s not legally needed for a sole proprietor or LLC without employees?
Yes, some banks request an Employer Identification Number, irrespective of the nature of your business. It is advisable to ask your bank if you can open a business account before doing so.
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