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As a startup founder, managing your business accounts is important. These accounts facilitate daily transactions, financial management, and compliance with regulations, making them indispensable.
Opening and closing business accounts involves several steps that directly impact business operations. Registering accounts with state and local authorities not only legitimizes your business but also grants access to essential financial services while ensuring you adhere to legal and tax obligations.
This article explores the necessary steps for opening and closing business accounts with state and local authorities. This will equip startup founders with the knowledge they need to manage their business accounts effectively.
An Overview of Business Accounts
A business account is a formal registration of your business with state and local authorities. It serves different purposes including:
- Legal recognition: It legally recognizes your business as an entity separate from its owners.
- Tax obligations: It ensures your business is registered for state and local taxes.
- Regulatory compliance: It helps you comply with various regulations and obtain necessary permits and licenses.
- Business operations: It facilitates the opening of business bank accounts, obtaining credit, and entering into contracts.
Types of Business Structures
You need to decide on the structure of your business before you register it. The most common types of business structures in the US are:
- Sole proprietorship
- Partnership
- Limited liability company (LLC)
- Corporation
- Nonprofit organization
What Should You Do Before Opening a Business Account?
Before you open a business account, you need to lay a strong foundation for your startup. Proper preparation ensures that you meet all legal requirements and set up your business for success. Here are the steps you need to take:
Choose the Right Business Structure
The structure you choose will impact your legal liabilities, tax obligations, ability to raise capital, and the day-to-day management of your business. Here are the most common business structures to help you make the right decision:
Sole Proprietorship
A sole proprietorship is the simplest and most common form of business structure. It’s owned and operated by one individual, and there is no legal distinction between the owner and the business. In other words, the owner is personally responsible for all debts and obligations of the business.
Pros
- Easy and inexpensive to establish
- Full control of business decisions
- Simple tax filing (business income reported on the owner’s tax return)
Cons
- Unlimited personal liability for business debts
- Difficulty in raising capital
- Business continuity is tied to the owner’s presence
Partnership
A partnership involves two or more people who agree to share in the profits or losses of a business. There are two common types of partnerships: general partnerships and limited partnerships.
All partners share equal responsibility for the management and liabilities of the business in a general partnership.
On the other hand, in a limited partnership, there is at least one general partner who manages the business and assumes liability, and one or more limited partners who invest in the business but have limited liability and no management authority.
Pros
- Easy to establish with shared financial commitment
- Combined skills and resources of partners
- Tax benefits (profits and losses pass through to partners’ tax returns)
Cons
- Unlimited liability for general partners
- Potential for conflicts between partners
- Shared decision-making can slow down processes
Limited Liability Company (LLC)
An LLC combines the benefits of a corporation and a partnership. It provides the limited liability protection of a corporation while allowing profits and losses to pass through to the owners without corporate taxes.
Pros
- Limited liability protection for owners (members)
- Flexible management structure
- Pass-through taxation (avoids double taxation)
Cons
- More complex and expensive to set up than a sole proprietorship or partnership
- State-specific regulations and fees
- Limited life in some states (dissolves when a member leaves unless specified otherwise)
Corporation
A corporation is a legal entity separate from its owners (shareholders). There are two main types of corporations: C corporations and S corporations.
A C corporation is the standard corporation, which is taxed separately from its owners. It can have an unlimited number of shareholders.
An S corporation, on the other hand, has pass-through taxation like a partnership but allows for limited liability protection. There are restrictions on the number and type of shareholders.
Pros
- Limited liability protection for shareholders
- Ability to raise capital through stock
- Perpetual existence (not tied to the owners’ presence)
Cons
- More complex and costly to set up and maintain
- Double taxation for C corporations (profits taxed at the corporate level and dividends taxed at the personal level)
- Extensive record-keeping and regulatory requirements
Name Your Business
The right name for your business establishes your brand identity and ensures legal compliance. Here are steps to guide you through the process:
Brainstorm and Research
Think of names that reflect your business’s mission, values, and industry. Choose something memorable and unique that stands out in the market.
Also, check if the corresponding domain name (website URL) is available. This is important for building an online presence. Conduct a trademark search through the United States Patent and Trademark Office (USPTO) to ensure your chosen name isn't already trademarked.
State Naming Requirements
Each state has specific rules regarding business names, especially for LLCs and corporations. The name must include words like "LLC," "Incorporated," or "Corporation," depending on your business structure.
The name must be distinguishable from other registered business names in your state. Most states provide an online database where you can search existing business names.
Registering Your Business Name
If you plan to operate under a name different from your legal business name, you’ll need to file a DBA, also known as a trade name or fictitious name, with the appropriate state or local agency.
Once you’ve chosen and checked your business name, you can register it with the state when you file your Articles of Incorporation (for corporations) or Articles of Organization (for LLCs).
Some local municipalities may also require you to register your business name locally. Check with your city or county clerk’s office for specific requirements.
We will shed more light on this aspect later in this article.
Obtain an Employer Identification Number (EIN)
An Employer Identification Number (EIN) is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to businesses operating in the United States. It is used for tax purposes and is essential for various business activities, like opening a bank account, hiring employees, and filing taxes.
The steps below will guide you to obtain an EIN:
Determine If You Need an EIN
Not all businesses are required to have an EIN. However, you will need one if:
- You have employees
- Your business operates as a corporation or partnership
- You file employment, excise, or Alcohol, Tobacco, and Firearms tax returns
- You withhold taxes on income (other than wages) paid to a non-resident alien
- You have a Keogh plan
- You are involved with certain types of organizations (e.g., trusts, estates, non-profits, farmers' cooperatives)
Gather Required Information
Before applying for an EIN, ensure you have the following information ready:
- Legal name of the business entity
- Trade name (if different from the legal name)
- Responsible party's name and Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- Mailing address
- Type of entity (e.g., sole proprietorship, partnership, corporation)
- Reason for applying for an EIN (e.g., starting a new business, hiring employees)
- Date the business was started or acquired
- Principal industry and principal line of business
Apply for an EIN
There are several ways to apply for an EIN:
- Online Application: It is the fastest and most convenient method is to apply online through the IRS website. The online application is available for businesses in the United States or U.S. Territories. You can complete the application and receive your EIN immediately.
- Apply by Mail: Complete Form SS-4, "Application for Employer Identification Number." Mail the form to the address listed on the IRS website. Processing time is approximately four weeks.
- Apply by Fax: Complete Form SS-4 and fax it to the IRS. If you provide a return fax number, you will receive your EIN by fax within four business days.
- Apply by Phone: International applicants can apply by calling the IRS at the designated phone number. An IRS representative will assign an EIN during the call.
After Receiving Your EIN
Once you receive your EIN, keep it in a safe place. You will need this number for various business activities like:
- Opening a business bank account
- Applying for business licenses and permits
- Filing federal and state tax returns
- Hiring employees and setting up payroll
How to Open a Business Account
Different steps are involved in opening a business account at the state and local levels. It’s important to comply with these requirements to legally operate your business and avoid potential fines or legal issues.
Below, we'll break down the process into state-level and local municipality requirements.
State-Level Requirements
Here are the general steps for opening a business account at the state level:
Choose Your Business Name
Your business name must be unique and comply with your state’s naming rules. Many states have online databases where you can check the availability of your desired business name.
Appoint a Registered Agent
A registered agent is an individual or business entity that receives legal documents on your business's behalf. The registered agent must have a physical address in the state where you are registering your business.
Prepare and File the Required Documents
Gather the necessary information and prepare the required documents for filing. This includes the Articles of Incorporation or Organization, the names and addresses of business owners, and the details of the registered agent.
Submit the Documents and Fees
Submit your completed documents and the filing fees to the appropriate state agency. This is usually the Secretary of State's office. Many states offer online filing options, making the process more convenient.
Wait for Approval
After submitting your documents, the state will review your application. If everything is in order, you will receive a certificate of incorporation or organization, officially recognizing your business as a legal entity in the state.
Apply for Necessary Licenses and Permits
Research and apply for any state-specific licenses and permits that are necessary for your business. Complete this step before starting operations to avoid legal issues.
Register for State Taxes
Obtain your state tax identification number and register for any required state taxes. This includes sales tax permits if you will be selling taxable goods or services.
Local Municipalities Requirements
These requirements vary depending on the city or county where your business will operate. Here's a detailed look at what you need to consider:
Business License Application
Most local municipalities require businesses to obtain a business license. This license allows you to legally operate within the city or county limits.
The application process usually involves filling out a form with details about your business, such as its name, address, type of business, and ownership information. You may need to pay an application fee, which varies by municipality.
Zoning Laws and Regulations
Ensure your business location complies with local zoning laws. Zoning laws regulate the types of businesses that can operate in specific areas and are designed to maintain the character and functionality of neighborhoods.
Check with your local zoning office to verify that your intended business location is properly zoned for your type of business. If your business requires special zoning approval, you may need to apply for a variance or conditional use permit.
Local Tax Obligations
Sales Tax Registration
If your business involves selling goods or taxable services, you must register for a sales tax permit with your local tax authority. Collecting and remitting sales tax is mandatory, and you must stay informed about the applicable sales tax rates and reporting requirements.
Property Tax
If you own commercial property, you are responsible for paying property taxes to the local government. Ensure you understand the property tax assessment and payment schedule to avoid penalties.
How to Close a Business Account
Here’s how to close a business account at the state and local levels. Following these steps will ensure that your business is officially and legally closed, thereby preventing future legal and financial complications.
State-Level Requirements
File Dissolution Documents with the State
File the appropriate dissolution documents with your state's Secretary of State office. This process officially notifies the state that your business is ceasing operations.
Also, submit any final annual or biennial reports as required by your state. This includes information on the company’s activities and financial status.
Settle State Taxes and Debts
File your final state tax returns, including income, sales, and other applicable taxes. Ensure that all state taxes are paid in full. Pay off any outstanding debts owed to state agencies, including fines, fees, and other liabilities.
Cancel State Licenses and Permits
Cancel any state business licenses or permits. This might include health permits, occupational licenses, or professional licenses specific to your industry. Inform all relevant state agencies of your business closure to ensure no future taxes or fees are assessed.
Local Municipalities Requirements
Inform Local Authorities about the Closure
Notify your local city or county government offices about your business closure. This involves submitting a business closure form or letter. Some local jurisdictions require a public notice of business closure. Check with your local municipality for specific requirements.
Settle Local Taxes and Debts
File your final local tax returns, including property tax, business license tax, and any other applicable local taxes. Settle any outstanding debts with local authorities, such as unpaid fines or fees.
Cancel Local Licenses and Permits
Cancel your local business license with the city or county office. This officially closes your business at the local level. Also, cancel any local permits related to health, safety, and building codes.
Wrapping Up
Opening and closing business accounts with state and local municipalities are important tasks for any US startup founder. Apart from operating legally, proper compliance builds a solid foundation for growth and success.
The steps discussed in this guide will help you to effectively manage the requirements and obligations at both the state and local levels.
If you ever feel uncertain or overwhelmed, don't hesitate to seek professional assistance. The peace of mind that comes from knowing your business is compliant and well-managed is invaluable.
FAQs
Why do I need separate business accounts for state and local municipalities?
There are two main reasons why you might need separate business accounts for state and local municipalities as a US Startup founder:
Financial Transparency and record-keeping
Having separate accounts keeps your business finances organized and different from your transactions. This makes bookkeeping and tax filing much easier.
Potential Tax and Legal Benefits
Depending on your business structure and location, separate accounts might impact your taxes and legal liability. For example, some states might require business accounts for specific taxes or permits.
When should I close a business account?
Here are situations where you may consider closing a business account:
Ceasing Operations in a Specific Location
If you're shutting down your business operations entirely within a specific state or municipality, you'll want to close any associated accounts. This ensures you're not hit with inactivity fees and keeps your business records accurate.
No Longer Needing the Account
Let's say you obtained a permit or license that required a specific account, but that permit is no longer needed for your business. In this case, you can close the account once the permit has expired or been terminated.
Are there any penalties for not closing a business account?
Yes, there can be penalties for not closing a business account with states and local municipalities. These penalties include inactivity fees, compliance issues, potential tax issues, and security risks.
