Business Checking Account: Do I Need One?

Can you use PayPal instead? Just opened an LLC.

[ngentot]

Hello all. I just formed an LLC for my online business. From my understanding, the next step would be opening a business checking account under the company's name, so my business and personal accounts (or money) will be completely seperate, in case the company gets sued. (hey you never know!)

But the thing is, I've been wondering if I actually need one. I've been using PayPal as my payment processor on my website. Since I can leave my money on my PayPal account and pay all my expenses with their debit card, it basically functions as my business checking account.

So do I still need a business checking account from a local bank? How do you all do it? Do you all have one especially if you're an LLC? What's the benefit of having a "real" business checking account? Can I use PayPal instead?

I'm just starting up. This is only my part-time gig. I'm trying to minimize the paperwork, cost and hassle since I'm the only one who's in charge with everything. And I have a day job too.

Thanks!

[diamondgrl]

PayPal will function legally as a bank account, I think. I'm no laywer, though.

However, the other concern is what about expenses like hosting and office supplies and whatnot? You can't pay with Paypal.

Now, it is possible to do very very careful accounting of all these expenses and with enough documentation and accouting, have the effect of creating a complete separation of business and personal expenses even without a bank account. The main legal concern is that the IRS or opposing legal parties will easily be able to disentangle what is a personal and business expense. But it is much easier with a separate bank account, frankly.

[ngentot]

Hey Diamond Girl,

Thanks for the response. I guess I'm not the only one still working Sunday night!

PayPal has this debit card with a MasterCard logo on it that you can use to pay anything like a credit card. It's priceless.

So with that, I can completely pay all my expenses from my PayPal account.

So what do you think? Am I OK using PayPal as a seperate bank account? I don't want to get into trouble here. Does it have to be a real business checking account from a bank?

Thanks.

[diamondgrl]

Again, I'm no lawyer, but I think you're fine under those circumstances. Just get Quickbooks or use some other form of accounting that keeps careful track of expenses and the purposes for them.

If you make a mistake and charge something by mistake to your business credit card, make sure you make an entry in your Quickbooks that describes it as an "Owner Draw", meaning you're taking money from the business, just as you might write yourself an owner distribution payment, or in your case, transfer money to your personal account. I don't think the legal system expects you to be perfect, just that you are showing good faith in trying to categorize everything and you document mistakes so that they go into the right money pot in the end.

You should be just fine in my non-expert opinion.

[diamondgrl]

I should also add that my advice might change if you were a person of significant means. While the risk is small of a lawsuit opponent "piercing the corporate veil", as this concern of yours is known, if you have significant net worth and your busines is small-time, you might want to be extra careful and not take any chances.

But if you're "judgment proof" - i.e. you are so poor you couldn't possibly pay any legal judgment against you - don't worry at all about lawsuits. Few lawyers will waste their time trying to sue you if you have no money to cough up.

[ngentot]

Thanks Diamond Girl,

That's very informative. I will definetely try to get software to help track my expenses. (I don't know what to use though. I've heard the latest versions of both Quickbooks and Quicken Small Business are so buggy they are almost useless)

Well, I'm no millionaire or anything close to that, even though I'm trying to be. So perhaps like you said I don't have to worry too much about lawsuits and focus more on my business instead.

Are you an accountant, by the way?

[diamondgrl]

I'm no accountant. Just a dabbler in many many things like many small business owners.

I use Quickbooks Pro Edition 2004 without complaints. I'm not sure what the complainers are referring to. If you're a novice at accounting and you aren't going to use super-complicated features, my guess is you'll do just fine choosing a basic Quickbooks edition or any other major-brand, competing software.

[Essex_boy]

I would still get a cheque account - you never know when the business may need an expansion loan.

[RedWolf]

While you may not really "need" a business checking account now, I would still look at getting one. There are a number of reasons that may become more important as you grow your business.

1) Supplier requirements - Many wholesalers require a number of things to prove that you are a real business customer. These can include a voided business check, resale license, city business license, invoices from other trade suppliers, etc.

2) Merchant Account requirements - If you decide to move up to a real merchant account in the future then they will require a business bank account to transfer payments.

3) Ability to accept other payments - If you decide to accept checks or money orders, then you should have a business account to deposit them into. While many online businesses don't like to bother with them because they are a bit more trouble than online payments I have found that they are about 5% to 10% of my sales just behind PayPal. I know PayPal lets people process an electronic check, but I'm not sure how many people will bother.

4) Ability to pay others - There are still some places that don't take credit cards that you may need to pay. Lawyers and accountants come to mind, though that is changing. Also if you ever need to hire an employee then it is easier to pay by business check. Also state or local taxes and fees for licenses or sales taxes need a business check.

[diamondgrl]

I'll second those comments. There are these other benefits in having a bank account.

[CernyM]

There are a multitude of banks that provide free business checking accounts out there.

I would generally recommend using one rather than relying on PayPal to hold all your cash.

* PayPal has in the past frozen accounts for a variety of reasons. Having the bulk of your money in a hard-to-freeze traditional bank account is safer.

* PayPal offers only FDIC pass-through insurance, not FDIC insurance. That means, you are protected if the bank that PayPal uses to hold your money goes belly-up, but not if PayPal itself goes belly-up. Now, obviously, PayPal appears to be fiscally sound and highly solvent, but it is a risk factor to consider.

* Most small businesses still find a need to write an actual check from time to time. Many vendors won't extend credit to new companies and you'd be surprised at how many B2B companies refuse to process credit cards. You sometimes need to hand a check to the UPS driver for COD packages.

* If you ever wish to set up automatic drafts that don't rely on a credit card, you can't do that with PayPal.

If you can never imagine having to write a check and are willing to trust PayPal with your money, then I don't think there is any harm in not getting a checking account. But, since checking accounts are free and only take about an hour to set up, I'd probably get one anyway.

[ngentot]

* PayPal has in the past frozen accounts for a variety of reasons. Having the bulk of your money in a hard-to-freeze traditional bank account is safer.
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Wow! I would definitely re-consider to get a business checking account for the above reason alone.

Can anyone recommend any good and inexpensive business checking account that's easy to get? I'm in NYC by the way.

Thanks for all your responses you guys!

[RedWolf]

Just about any of the major banks have a free or very cheap (under $10/month) business checking account. I have used Wells Fargo and Washington Mutual, but I'm not sure what banks are in NYC. Cruise the banks websites and look in the business sections for terms like basic, small business, low activity, etc to find the cheap accounts. Some only let you do 20 to 50 transactions a month, some only count paper checks against the minimum and some count electronic transfers as well which can be bad if you have a merchant account or are making a lot of transfers from paypal or using a debit card to by things.

[JonR28]

Also the Mastercard on Paypal doesn't give you a 3-digit CVV number which nearly every online store requires these days. I can't order anything with it.

I don't know where you live but I use wachovia for my business checking. Its $10 a month unless you have over $2,500 in it. They gave me the first 7 months for free, and $60 worth of custom checks and stamp thing for free. I'm sure most banks could give you a nice startup. Especially if you live in CA... they have free business-banking accounts there. Doesn't take too much time, just hop into the bank and you'll be out in an hour.

[lgn1]

If I don't have my card on me I just give a CSV number of triple zero, and it works in most cases. A lot of companies use a fraud risk scoring system, and I belive that triple 000 indicates CSV unavailable. If everything else matches up on the card, you will get a 8 or 9 out of 10 for risk score, and this will ussally pass the screening process.

Back to business checking account, it all depends on the country you are in. But it all comes down to keeping all your receipts, and documenting all non-business expenses. Mixing personal and business expenses, and not having a buisness banking account, will probabily cause a tax auditor to look more closly,
incase of a random tax audit.

[ngentot]

Wait a second. If I remember correctly, I read a message on this board where a person said that PayPal can still take your money from your bank account if they think it's necessary. So it's basically useless to have a business checking account to protect your money from being frozen or taken away by PayPal.

This person then suggested that you have another checking account that's not registered with PayPal. So as soon as your money arrives to your first checking account, transfer it to your second checking account. That way, PayPal can never touch your money. Is this true? Anyone heard about this?

Anyway, I did my research on the business checking account in my area. Seems like Washington Mutual offers the best deal:

Chase - $15 - 100 transactions/month
Fleet/Bank of America - $15.95 - 75 trans/mo
Commerce Bank - Free First Year - 300 trans/mo
Wachovia - $9 - 150 trans/mo
Washington Mutual - $0 - No Limit for trans/mo
Bank of New York - $? -? trans/mo
Citibank - $19 - 100 trans/mo

JonR28: My PayPal MasterCard Debit Card actually has the 3 digit number on the back.

Thanks.

[fourstardragon]

Hello ngentot.
>Can anyone recommend any good and inexpensive business checking account
>that's easy to get? I'm in NYC by the way.
Certainly shop around. Consider credit unions as well. You might be able to find an option that is free for low-volume use if you keep a minimum balence. There are lots of those here, but I've never looked in NY.