Congratulations on starting your own business! Before you get to the fun part — actually running your business and making your fortune — there is still some admin to do. This includes deciding what sort of business structure you want to officially register as. The most common business structures in the US are Sole Proprietorships, Partnerships, Corporations and Limited Liability Companies otherwise known as LLCs.
Why choose to register as a partnership vs. an LLC? Would operating as a sole proprietorship vs. an LLC be better for your business? There’s a lot you’ll need to take into account before making a decision.
If you decide to register as an LLC, you will want to open an LLC bank account. In this article, we’ll be exploring the benefits of an LLC bank account, as well as some potential negatives you might want to consider before registering as an LLC.
What is an LLC Bank Account?
An LLC relieves stakeholders of the company’s liabilities and debts. An LLC bank account helps to prove the business and the owner/owners are separate entities. This is particularly important if a legal suit arises. None of us wants to think about our business being involved in a legal suit, however, it’s smart to be prepared just in case. For small businesses, opening an LLC bank account can be particularly advantageous as it can provide added financial protection.
Unlike a regular personal business account, opening an LLC bank account will require you to provide an EIN and other business documentation. Â
Pros of Opening a Business Bank Account for an LLC
If you don’t already have a separate bank account for your business, you’ll need to open a business bank account if you have registered as an LLC that has shared access for all owners involved in the business. Here are some of the benefits of opening an LLC business bank account.
Provides Added Protection
The key benefit of having an LLC is that this provides you with legal documentation showing that the business and business owners are two separate entities. Therefore your personal finances are not in immediate danger. An LLC bank account adds an extra layer of protection by ensuring these two sets of finances are always separate.
Makes Bookkeeping More Manageable
Keeping your business finances in order is a lot simpler when your expenses are separate—and your bookkeeper will thank you. What does a bookkeeper actually do? Having an LLC bank account for your business finances will allow your small business’s bookkeeper to easily understand what set of numbers is relevant to the business and what to stay away from.
Tax Season is Easier to Navigate
Tax time will be a lot less intimidating when you have an LLC bank account for your business. For one thing, all your relevant transactions will be in one place. LLCs also allow you to combine the liability protection of a corporation with the tax treatment and ease of administration of a partnership or sole proprietorship.
When it comes to tax time, the IRS will automatically classify your business as either partnership or sole proprietorship based on how many owners there are. This means you can pass through your taxes and are exempt from corporate taxation. With an LLC, taxes are generally more simple and straightforward than with other corporate business structures.
Cons of Opening a Business Bank Account for an LLC
If you do choose to register as an LLC you MUST open a second account for your business. While there are many benefits of registering as an LLC, it is not necessarily the right choice for every business. The following are some potential downsides of becoming an LLC.
Gives Up Sole Control Over Finances
If you are a business with multiple owners, your LLC bank account will serve as a joint account. All owners will have access over this account meaning you will have to forfeit having sole control over business finances.
However just because you don’t have full control over the finances, doesn’t mean you can’t keep an eye on what is going on within the business account. You can create visibility with integrations. Integrating some business tools like eCommerce and bookkeeping software systems can help enhance your visibility and communication across the account. This will make sure you and the other owners have a clear idea of what is going on at all times.
There are Start-Up and Associated Fees
There are a number of fees you will have to pay if you want to register your business as an LLC. The first fee you’ll have to pay is to register as an LLC and this can cost anywhere from $40 to $500 depending on what state you register in.
There are also maintenance fees that come along with having an LLC. This will also differ from state to state and can change at any time. In this way, running an LLC is more expensive than having a partnership or sole proprietorship. That being said, it does offer you more protection over your personal finances and therefore also has the potential to save you money in the long run.
More Leg Work During Tax Season
When your business is registered as a sole proprietor or a partnership, your business and personal taxes are one and the same. As an LLC, there are some key mistakes you’ll want to avoid when filing your business taxes. When the time comes to file, you will have to file two sets of taxes, one for your business and one personal. This is why as an owner of an LLC it’s important you are diligent with separating your personal and business finances.
At the end of the day, whether you register your business as an LLC or choose a different business structure should come down to what will best suit you as a business owner. Some businesses do just fine as sole proprietors and others can benefit from a regular corporation.
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