How to Open a Bank Account for a Nonprofit Organization

Why you should open a nonprofit bank account right away?

Right after the Incorporation, nonprofit organizations must open a bank account. Contrary to the ill advice given by the so called experts, don’t wait until your exemption status is approved to open a bank account for a nonprofit organization. An incorporated nonprofit organization is a legal business entity, regardless of its exemption status.

In this day and age, you can’t even operate a Falafel Stand without a bank account, let alone a nonprofit organization.

You need the bank account for the nonprofit to pay your IRS form 1023 application fee, open a PayPal account or similar payment processing accounts for accepting donations, and most importantly, regardless of the available funds, you should absolutely refrain from using your own  personal account for the official nonprofit business.

How to choose a bank for a nonprofit organization

Almost all banks have some kind of discounts or special incentives for nonprofits but don’t be fooled with these gimmicks. Pick a brick and mortar bank from the bunch and hopefully one with no fees. Most large banks charge monthly fees for business accounts (nonprofits included) and don’t bring anything of value to the table for that fee.

If your organization is going to have employees, make sure that the payroll processing is included in your account and hopefully free. A Credit Union is an excellent choice for starting a bank account for a nonprofit corporation as credit unions usually offer lower fees, higher savings rates, and a more customer friendly approach. Credit unions may not have a 24/7 call center, but if the financial institution is worth its salt you shouldn’t need it anyway.

You might like to know that Credit Unions are nonprofit in nature and in reality. Although they are not exempt under the section 501c3 like a public charity; all credit unions are nonprofits and tax-exempt under the 501(c)(1) if Federal, or under 501(c)(14)(a) section of the Internal Revenue Code if chartered by a State. Do business with your peers, it’s as simple as that.

Who can open a nonprofit bank account?

For opening a run of the mill bank account, all banks are obligated to confirm the account’s beneficial owner to make certain that the account is owned by an individual or entity. Nonprofit organizations don’t fall under this rule. Instead nonprofit organizations open their bank account by providing their organizing documents such the articles of incorporation or certificate of formation.

Armed with the blessing of the nonprofit’s board of directors, any one of your board members should be able to open a bank account for the nonprofit organization, but it is imperative not rely on only one person with access. You should assign at least two board members (president and the treasurer normally) as legal representative of the organization with dual signature on all checks with no exception to cut down of potential corruption and theft.

Most banks will require you to have a board resolution (along with board minutes of that meeting) signed by the corporate secretary to be presented at the time of the bank account solicitation. Please see sample Nonprofit Board Banking Resolution below (It is included in a Microsoft Word document format with my other templates):

What documents do I need to open a nonprofit bank account?

Every bank has different requirements for opening a nonprofit bank account but the following documents are almost universal in their requirements:

• Nonprofit Articles of Incorporation or the Certificate of Formation
• Nonprofit Bylaws signed and executed
• Employer Identification Number (EIN)
• Social Security and driver’s licenses of the directors (ones with access to the account)

Since a nonprofit bank account is basically a business account; it is almost guaranteed that you have to go there in person (unless you’re opening an account with an online bank) so you should call the bank and ask them for what they need from you ahead of time so you don’t make a trip for nothing.

Do you have to be a 501c3 or exempt organization before opening a bank account?

I’m aware that some banks ask for the tax exemption letter from the IRS, but this is beyond idiotic and most likely stem from lack of knowledge and understanding of the banker. An incorporated nonprofit is a legal entity whether it pays taxes or not. If your bank is asking for this letter, ask for someone with more brains or walk out and find another bank, unless they are asking for it to give you some kind of additional free benefits. Even then, they can do that later.

Nonprofit bank accounts and IRS compliance

Beside facilitating financial transactions, nonprofit bank accounts are necessary for keeping the IRS happy when it comes to exempt organizations compliance. One major compliance issue is the books and record keeping responsibilities of the nonprofit organization.

I’ve explained the importance of record keeping for 501c3 nonprofit organizations in detail, and having a nonprofit bank account strengthens that. Basically, you need to refrain from conducting cash transactions as it has no paper trail (audit trail to be honest) and the IRS doesn’t like it.

Another example would be that beside filing the Form 990 every year, you should still be aware that all banks are required to report received payments exceeding $10,000 to the IRS. There is nothing wrong with receiving large donations, however your form 990 and reporting should all be on the same page or you will be audited for misrepresenting your financial matters.

Conclusion

• Don’t wait until your determination of tax exemption to open a bank account for the nonprofit organization; one thing’s got nothing to do with the other.
• Don’t use your personal bank account for the official organization’s matters.
• Opt for a Credit Union as your banking provider; you’ll be happier in a long run.
• Shop around before settling with a particular bank; get all the benefits you can possibly get for free.
• Always have dual signatures policy on all checks, and try not use the debit card for that very reason.

NOTE: If you’d like to receive the following organizing documents:

• Nonprofit Articles of Incorporation,
• Nonprofit Bylaws,
• Nonprofit Conflict of Interest Policy,
• Conflict of Interest Policy Acknowledgment,
• Form 1023 Attachment with all the answers,
• Form 1023 Expedite Letter template,
• and Donor Contribution Form

in Microsoft Word Document format, please consider making a donation and you’ll get to download them immediately. Not only they're worth well over $1000 in value, they will save you weeks of copy pasting and formatting as they are ready to go templates which only need changing names and addresses.