Opening a bank account for your business is one of the vital first steps you must take during your company’s journey. This account will be responsible for receiving payments, paying employees, purchasing inventory and equipment, and covering several other financial needs throughout your business’ lifetime.
Many people think that you need an EIN, or Employer Identification Number before you can open an account. And while this isn’t strictly true, having an EIN number can greatly increase your banking options and reduce the stress of constantly needing to prove your business’ legitimacy to financial institutions.
What is an EIN?
Your business’ EIN is, essentially, a social security number for your company. It’s the unique nine-digit code that separates your business from others in the eyes of the Internal Revenue Service (IRS).
This EIN number goes by many other names including FEIN, or Federal Employer Identification Number, and Tax Identification Number, but no matter what name it’s called, your EIN is usually essential in any finance-related business situation. Some business types may be exempt from needing an EIN, for example, sole proprietorships, but typically any business that operates under the assistance of employees will need an EIN.
Partnerships, multimember LLCs, and corporations are all required by law to have official EINs before opening any kind of company bank account, and their failure to acquire an EIN beforehand may result in unfortunate legal repercussions.
Do I need an EIN to Open a Business Bank Account?
Before you can conduct any kind of business with a bank, you will need to verify both your business’ identity and its nature. If you have an EIN, this is a very simple, straightforward process because all of the necessary information banks require will be handily located under that identification number. Without an EIN, this process becomes much more difficult, so it’s no wonder that many banks have strict policies in place to prevent businesses from opening bank accounts if they cannot provide an EIN. However, there are other banks and financial institutions in place that don’t require an EIN for you to open a business account.
Typically, sole proprietors and single-member LLCs are able to open bank accounts for their businesses so long as they remain owned and operated by a single individual. In this case, the owner/operator must provide their Social Security number and may also be required to produce tax returns, their business’ name registration, and their business license.
Opening a Non-Business Bank Account
It may seem like the simple option is to avoid all EIN-related hassle is to just open a non-business bank account. While this may be an easier option in the beginning, it can, unfortunately, end up causing you a lot of stress.
Keeping your business and personal finances all mixed up in non-business accounts can land you in a lot of trouble with the IRS if it causes you to incorrectly report your earnings. Additionally, if your personal accounts also host your business’ money, any legal actions taken against one, such as a lawsuit against your company. can impact the other.
By taking the time to clearly delineate a line between your personal accounts and your business accounts, you will undoubtedly save yourself many headaches, but investing in an EIN isn’t just about avoiding problems. In fact, by having an EIN you also set yourself up to benefit from several unique advantages.
Advantages of Having an EIN for Your Business
There are numerous advantages to having an EIN for your business including increasing your banking options, building business credit, legitimizing your business, and much more. Let’s take a closer look at these and a few other key benefits to registering your business with a proper EIN.
More Banking Options
Even if you’re a sole-proprietor or a single-member LLC that doesn’t legally need an EIN to operate, you will find that not having the number may severely limit your business’ banking options. Some banks do permit non-EIN businesses to open accounts, but those that already have an identification number with the IRS will have a much wider range of banks to choose from. This allows you to keep the market competitive in your business’ favor with banks clamoring to give you the best rates.
Can Hire Employees
If you don’t have an EIN, you cannot hire employees to work for your company. Businesses are only exempt from EINs if they operate under the efforts of a single individual. Any additional help or service paid for is not permitted under federal laws. So even if you are a sole-proprietorship, by investing in an EIN early on, you can set yourself for success when you eventually do want to start hiring employees, contractors, or other individuals.
Keep Finances Separate
It cannot be stressed enough how important it is to keep your personal and professional bank accounts separate. Doing so can save you a lot of trouble, especially when tax season comes around and you have to account for every single dollar you’ve made or spent in the name of your business. If you have to sort through all of your personal expenses for the year to find business expenses and profits, you’ll cost yourself a lot of time. And, even if you spend weeks combing through all of your records, you may still miss a paycheck or two that can result in legal claims being filed against you by the IRS.
Build Business Credit
Having good credit in your personal life is vital when it comes to qualifying for credit lines, purchasing or renting homes, and buying vehicles. And if personal credit is so important, you can bet that your business’ credit is even more valuable. With good credit, your business will be qualified to obtain capital, buy necessary stock and inventory, hire new staff, cover daily expenses, and more.
Applying for Business Loan
When you start a new business, you may not be thinking about needing business loans down the line, but most kinds of growth will require financial assistance. Business loans are great for this, and having an EIN will significantly increase your chances of receiving the loans you need. Additionally, bank loans for businesses can have better interest rates and faster processing times than many traditional loan types.
Can Apply for a Business Credit Card
Similar to opening a bank account, having an EIN makes you more likely to qualify for a business credit card. This is yet another way you can work to enhance your business’ credit, improve your business’ credit score, and receive lower rates than traditional personal bank accounts may offer.
Legitimize Your Business
It can be incredibly difficult to prove the legitimacy of your business without an EIN. If you don’t have the tax ID number, you will need a host of other documentation to prove that your company is legal, registered with the IRS, and eligible to hire employees, provide services, and conduct other business.
How Do You Get an EIN?
In order to apply for an EIN, you will need a bit of documentation. Generally, you’ll need to present your Social Security number and have your business’ address, type, and member count on hand. Additionally, you’ll need to be able to recount why you’re applying for an EIN, the date you started your business, your industry, the number of employees you expect to have when wages begin, and what kind of employer tax return you’d like to file.
Fortunately, applying for an EIN is a straightforward process. There are several different ways you can apply whether via mail, fax, or the internet, but of them, the easiest is by simply visiting the IRS’ official website. Once you apply, you can immediately get your EIN. Keep in mind that you may still need to check with your state to see if a state number or charter is required for your business.
Deciding If an EIN is Right for You
As long as you meet the necessary legal requirements, you may never need an EIN to open a business bank account. But carefully consider all the unique advantages that having the number will grant you before making any decisions. An EIN can boost your business’ legitimacy, allow you access to better banks, funding, and credit lines, and much more.
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Editor’s Note: This post was originally published on September 30, 2020 and has been updated for accuracy and comprehensiveness.