Get Your Corporation Running in 6 Weeks Week 2: Bank Account / Merchant Services

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In part two of our series on jump starting your Corporation, we will review the sales arm of your company. Now that you have filed the appropriate licenses and registrations, you can turn to setting up your finances including your merchant account.

One of the most attractive aspects of incorporating is that you can protect your personal financial liability. The first step in doing so is creating a bank account for your corporate entity so that all business transactions are run through this separate corporate bank account.

First Things First...A little explanation please.

Because a corporation is a separate legal entity, it can hire employees and perform business transactions under its own name. For this reason, all corporations are required to open a separate bank account, which protects the owners and shareholders from being personally liable for the debts and liabilities of the corporation. This is probably the most important aspect of forming a corporation.

Applying for an EIN

Before you can even open an account, you will be required to apply for a federal tax identification number with the IRS (also called an Employer Identification Number or EIN). An EIN is a business's unique numerical identifier and is obtained through the IRS by completing and submitting IRS Form SS-4. Basically, it is the Social Security Number of the business.

Obtaining an EIN can be done on-line through the IRS or through the www.legalzoom.com website or over the phone by calling LegalZoom for more information on obtaining your Tax ID (EIN) number. Simply call (888) 381-8758 from 6:30 a.m. to 6 p.m. Pacific Standard Time.

Choosing a Bank

Once you receive your corporation's EIN from the IRS, you can then open your company's bank account. But, choosing a bank isn't easy, as there are numerous banking choices, from the local bank down the road to the larger, national institution. The answer to which bank you choose is dependent on your particular business and its financial needs.

If you do a lot of business travel, you may want to consider a larger bank that will have more branches and ATMs across the country for immediate service. On the other hand, if most of your business is local, a community bank that services a certain area may provide additional monetary benefits for businesses that contribute to the community's economy, such as waiving the first year's bank charges.

In deciding which bank to go with, you should strongly consider the specific fees and benefits of each bank. Some specific questions to ask include:

  • What is the bank charge for each transaction your company makes?
  • Do you need to have a certain amount of capital for the banking relationship to be beneficial?
  • How much interest is paid on the money in your account?
  • Are there insurance policies held by the bank on a percentage of your money?
  • Can you upgrade your services, if necessary, at a later date without fear of penalty?
  • If you are looking to purchase a building or vehicle in the future for your business, does the bank offer attractive business loans?

Separate Tax Accounts

Another business aspect to think about when shopping for banks is taxes. By law, taxes that are withheld are required to be maintained in a separate bank account from other monies. Therefore, one bank account should be established for your business transactions and another bank account to deposit sales tax collected from customers and, if applicable, for taxes withheld from employees' paychecks. This ensures that funds are available to satisfy tax liability. However, each account is going to cost you money to maintain and, again, should be chosen based on the business's financial needs. Therefore, a banking strategy that could be beneficial is to find banks that give "packaged deals" for multiple business accounts.

Will that be cash or charge?

Once you have your bank account set up, you can then make the decision as to whether you plan on allowing your customers to pay with a credit card and if you are going to allow for on-line transactions. If the answer is yes, you will need to select a merchant services provider or financial institution that sets up merchant accounts. These accounts allow your customers to pay using a credit card, which is then transferred to your bank account. They also allow your company to sell goods and services via the Internet.

Merchant services tie a credit card processor to a company's bank to help route payments into the bank account. When a customer gives a business their credit card information for a purchase, the credit card information and transaction data are transmitted to the merchant account provider, which authorizes the information. After the payment is authorized, the funds are transferred to a holding account set up with the merchant account provider. Funds in the holding account are then deposited into the business's checking account.

Not only can a business increase sales dramatically by allowing for credit card transactions; customers can have the convenience of purchasing goods and services on-line, which is becoming more and more prevalent. However, merchant account services are not free; business may pay start-up fees of $50 to $200, plus monthly fees and a fee for each transaction. For this reason, merchant service providers should be researched carefully and chosen depending on the particular business.

There are two types of merchant accounts: traditional merchant accounts and on-line merchant accounts. Traditional merchant accounts authorize and transmit credit card payments using a credit card machine (swipe terminal), which is installed at the business. On-line merchant accounts accept, authorize and process credit card transactions securely over the Internet. Again, what type of account you use will be based on your specific company's transactions.

Do Your Research

The best way to find a suitable merchant account is to shop around and compare merchant accounting service companies. Talk to other business owners about their experiences with merchant service providers and find out if service providers have any hidden chargeback fees, pass through fees, minimum fees or termination fees. These fees are a huge revenue source for processors and should be investigated thoroughly. In addition to researching the service provider, you should also examine the hardware. Always ask if there is a start-up cost, hardware pricing, and software license fees. Finally, when doing business on-line, you are likely to get a number of declined transactions. Those declines cost money per transaction, and a less than reputable processor can tack on declined transaction charges.

First Data Corp. also offers a wealth of information on accepting credit cards for your business. Plus, if you already have a merchant account, you can also receive a free statement analysis as well. Click here to learn more.

Before Signing on the Dotted Line...

As with any business partnership, be careful when finalizing your business with both a bank and a merchant account provider. Read the small print carefully to make sure the financial institution is the best match for your particular company.