What to Know Before Opening a Joint Business Bank Account
Benilyn has over a decade of experience as a banking officer. Her expertise is featured throughout Fit Small Business in personal finance, credit card, and real estate investing content.
This article is part of a larger series on Business Banking.
A joint business bank account offers a convenient way for you and your business partners to consolidate and monitor your business finances. However, since you and your partners will have equal access to your business funds, you have to know the risks and rewards involved with opening a partnership bank account before deciding if this is the right option for your business.
Why Is a Joint Business Bank Account Important?
A joint business bank account is important for business partnerships because it promotes transparency by allowing all business owners access to the same business funds and banking transactions. This makes accounting much easier and more transparent as all co-owners can view their business banking activities.
Who a Joint Business Bank Account Is Best For?
A joint business bank account is best for businesses with two or more co-owners but are not registered as a limited liability company (LLC) or corporation. This type of account is best for business owners who own a partnership business that operates under the partners’ names or as a DBA (doing business as).
Benefits of Opening a Joint Business Bank Account
There are several good reasons why you should consider opening a joint business bank account with your business partners. Aside from providing transparency when it comes to your business’s financial transactions, having a joint business bank account offers a lot of other benefits, which are listed below.
Separation of Business and Personal Finances
Having a separate bank account solely intended for your business is necessary if you want to separate your business and personal finances. A joint business bank account is a good option for partnership businesses that are not yet registered as LLC or corporation. With a partnership bank account, you can avoid commingling your business financial activities with your personal funds while keeping the transparency of your transactions between co-owners.
Business Finances Are Consolidated Into One Account
A joint business bank account allows you to maintain all your business finances in one account, making it easier to monitor the movements of your business funds. It lets you pay your business expenses from one account, so it’s possible to track your finances and catch discrepancies more efficiently. Without a business account, tracking your financial activities will be difficult, especially if you use funds from multiple bank accounts owned by different partners.
Co-owners Will Have Equal Access to the Account
With a joint business bank account, you and your business partners will have equal access to the account. Many banks will let you add more than two owners to the bank account, which is advantageous if you have multiple business partners. By giving equal access rights to all partners included in the same account, you can work more efficiently as everyone will be able to make deposits and withdrawals, pay bills, and transfer funds without the consent of the other partners.
Increased FDIC Coverage
Another benefit of having a joint business bank account is that it increases the Federal Deposit Insurance Corporation (FDIC) limit for the business because each co-owner is covered by up to $250,000 FDIC insurance. So, by adding a second account owner, you’ll get $500,000 of insurance under one account. However, this coverage includes all other bank accounts under the name of the co-owner in the same financial institution. If you want to have maximum coverage, it’s best to open a business account with a bank that is different from where you and your business partners maintain your personal bank accounts.
Drawbacks of Partnership Bank Accounts
While a joint business bank account is important for partnership businesses, there are some things that you need to consider before opening one. Since a joint bank account can be accessed by more than one person, there are risks and complications that you should be aware of. The following are a few drawbacks of having a partnership bank accounts.
Each Partner Has Equal Ownership Rights to the Account
While this was also an advantage of a joint account, it can also present problems. The money in a joint bank account is owned by all co-owners listed on the account. Each account owner has equal access and rights to the business funds and can withdraw money whenever necessary. It’s important to note that a joint account holder can withdraw all the funds from the account even if he or she did not deposit his or her personal money into the account.
Equal Liabilities in Case of Mismanagement
Since all owners have equal ownership rights to the bank account, this means that all account owners are also equally liable in case of mismanagement. It doesn’t matter who made the mistake—if your partner overdrafts or bounces a check, everyone is still responsible for the penalties. Any account mismanagement could also reflect badly on your personal bank record, especially if this is reported to ChexSystems. A bad ChexSystems record could prevent you from opening bank accounts in the future.
Higher Chances of Error
If there are multiple people accessing the account and making multiple transactions, it’s easy to mistake a transaction as unauthorized. This can lead to false fraud claims to the bank and unnecessary bank fees. Similarly, it can be difficult to control the transactions since each co-owner has easy access to the funds. This can also create misunderstandings between the owners, especially if the transactions are not accounted for well.
Higher Risk & Lesser Asset Protection
Depending on the terms and conditions of your account, It’s possible for creditors to collect from your joint business bank account if your partner has unpaid debts. It doesn’t matter who deposited the money into the joint account. Therefore, since all account holders have equal rights to it, your business partner’s creditors could go after your funds.
How to Avoid Risks Associated With Opening a Joint Business Account
It’s essential to be aware of the risks associated with opening a joint business account so you will know how to avoid them. Here are some ways to avoid these risks:
- Have a clear accounting record: Since all account co-owners have equal access rights to the account, be sure to have a clear accounting record as to who made a transaction, when, and for what. This will eliminate the chances of mistaking a transaction as unauthorized. It can also provide the owners with a clear understanding of the purpose of every financial transaction.
- Have an agreement with your partners: It’s best to have a written agreement with your partners about the management of your bank account. To avoid unnecessary liabilities, perhaps you can agree to charge any penalties to the personal account of an erring partner.
- Choose a bank that can provide customized terms: Choose a bank that can provide customized terms and conditions for your joint bank account so it can be protected from personal creditors.
- Know your partners’ financial situation: It’s important to be aware of your partners’ financial situation before agreeing to open a joint account with them. If they are in debt, consider it as a red flag and think carefully before opening a joint business account together.
Bottom Line
A joint business account provides a great opportunity to consolidate your partnership business finances. Before you decide to open one, make sure to understand the pros and cons and that you trust your partners and their financial background fully to avoid possible financial issues in the future.
