As a sole proprietor, organizing your business finances is critical. Whether you’re just starting or have an established firm, keeping your business and personal finances separate is important. It is good to open a business bank account for your small business and get aware of your finances.
The division not only helps keep your finances structured, but it can also make company activities like filing taxes, sending international and domestic transfers, and managing invoicing easier. So, in this article, we will provide information about opening a business bank account for your sole proprietorship.
A sole proprietorship is an unincorporated business with a lone or one owner who pays personal income tax on business profits. Many sole owners operate under their own identities because registering a separate company or trade name is unnecessary.
Advantages of Being a Sole Proprietorship
- Availing Tax Benefits – Income earned by a pass-through firm is subject to a single layer of income tax and, in some situations, may be eligible for a 20% tax deduction. Along with lowering the corporate tax rate, the Tax Cuts and Jobs Act (TCJA) of 2017 offered a tax cut for pass-through organizations, allowing them to deduct up to 20% of eligible business income.
- Less Paperwork – You can complete some paperwork with a sole proprietorship, such as registering with your state. Depending on your state and type of business, you may need to obtain a license or permission. However, less paperwork allows you to get your firm up and running more quickly.
- Easy Accounting with EIN – You can open your sole proprietorship account using the Employee Identity Number(EIN).
- Easy Formation – Starting a sole proprietorship is very convenient and affordable compared to other business organizations. You can name the proprietorship after yourself or come up with a fictitious name that can help boost your business’s marketing efforts.
Disadvantages of Being a Sole Proprietorship
- No Liability Protection – When a company is registered, it gains certain legal protection. A sole proprietorship, for example, offers no liability protection to the owner. An LLC, conversely, is immune from creditors seizing the owner’s assets, such as their home.
- Difficulty in raising capital for business – The owner needs help in raising capital for the business, and it becomes difficult to get.
Is it possible for a sole proprietor to open a business bank account?
Yes, establishing a sole proprietorship bank account is an important step toward professionalizing your business operations, ensuring financial transparency, and simplifying effective financial administration. It serves as a firm basis for the financial success and expansion of your sole proprietorship.
Do I need to open a separate bank account for my sole proprietorship?
A lone entrepreneur is not legally required to have a separate bank account for their business. Some, however, propose having a dedicated business account for a variety of reasons, including:
- Bookkeeping and tax advantages – Separate accounts can help with legal and tax compliance. It can help assure precise business income and cost reporting, making tax compliance easy.
- Organization – Multiple bank accounts might help you manage your cash flow by holding money in different accounts for different objectives. For example, a company may save money in one account for operating expenses and another for taxes.
- Professional demeanor – Opening a company bank account might help you project a professional image.
- Keeping your credit score safe – Keeping your personal and business assets separate can safeguard both your personal and business credit scores.
How to select a business account for a sole proprietor?
Consider the following when choosing a business account for a sole proprietor:
- Low/ No Monthly Fees – Some banks charge monthly fees for online transactions, or in case you need help maintaining your minimum balance requirements.
- Low/ No Minimum Balance Requirements – To avoid monthly costs, many banks impose a minimum account balance that sole owners must maintain.
- Online Banking – The bank must offer an online banking system so that you can perform online transactions easily.
- FDIC Insurance – The FDIC provides deposit insurance to protect your money in the event of a bank failure. Your deposits are automatically insured up to a maximum of $250,000 for Fund protection.
How to Open a Bank Account for a Sole Proprietorship?
Step 1: Register your company name with state and municipal governments
Before creating a business bank account, register your business name with state and municipal organizations. Depending on your industry, you may be required to register a company before starting a business.
Step 2: Find the Best Bank Account
When it comes to the best sole proprietorship business bank accounts, there are numerous options. When opening a sole proprietorship bank account, there are multiple types of accounts to consider.
Many banks will waive or provide fee-free business bank accounts, perfect for a small or starting business.
- Traditional business checking accounts – These are checking accounts offered by traditional banks such as US Bank and Chase that provide a wide range of business services. If necessary, several of these banks have physical premises.
- Online business checking account – Fintech companies offer online business checking accounts, many of which have low costs and unique features. These banks are only available online, which is inconvenient for firms that deal with cash regularly.
- Business savings account – Many commercial banks provide CD accounts and money market accounts that pay interest, allowing your reserve cash to increase. This suits solo owners who have built up financial reserves throughout their business.
Step 3: To open an account, go to your local bank branch.
Step 4: Make an initial deposit
You can deposit cash, cheques, or electronic funds via ACH or wire transfers. Most accounts can be started within one business day, while others may require a couple of days to check all of the necessary company documents before being opened.
What are the necessary documents to open a sole proprietor business account?
To open an account, you must give your bank with specific documentation. Here are the documents needed to open a sole proprietorship bank account may include:
- If you have more than one fictitious business name certificate or doing-business-as (DBA) certificate, provide your Social Security number or EIN.
- Documents for the formation of a business
- Records about your organization, including your ownership agreements
- Business permits
- Photo identification from the government, such as a passport or driver’s license
- Your contact details
- If available, information on business revenue and taxes.
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