In regards to starting a company via the e-Residency Estonia program, I frequently get asked whether or not it is necessary to also open a business bank account.
The reason why this question gets asked in the first place is because one of the major players in the e-Residency world (LHV Pank) requires a face-to-face meeting to open a bank account.
That means you would have to travel to Tallinn, Estonia to meet with a bank representative.
There have been some talks that regulations will change in the near future at which point opening a business bank account can be done remotely, but nobody will be able to tell you when things really change.
Do I even need a business bank account? If so, can I delay the process?
If you don’t absolutely (say for daily operations) require a business bank account, then you don’t need to open one right now.
At some point you will have to open a bank account because the share capital payment for your Estonian company (minimum €2,500) needs to go from your personal account right into the business bank account.
PayPal or some other electronic money account can’t be used. It needs to go into your actual business’ bank account.
The process of making the share capital payment can also be delayed.
To recap: You don’t need to open a company bank account right away. You can (and for some people it will be smart to do so) delay that process.
Given that you are not required to open a bank account from the get go, why would someone still opt to fly to Tallinn to go through that process rather than wait until remote opening is possible?
That’s because when considering whether or not you need an LHV Pank/bank account, there are many factors to consider.
Bank Account YES/NO? – Holistic Approach
Payments – How do you plan on receiving (and sending) money? There are many other payment providers, but none of them are useful if you receive payments, say from Amazon FBA. Amazon makes payment to ‘real’ bank accounts only.
The same applies to CreateSpace, Audible and Stripe payouts.
Safety of Funds/Deposit Protection – Setting up a bank account requires more than just a few clicks, but one of the upsides to having one is that your funds are usually saf(er) than having them in an electronic money account.
In many instances all it takes are a few fraudulent (looking) transaction, a high chargeback rate … and you account either gets suspended and/or your funds frozen (possibly for weeks/months).
If this isn’t something you worry about, you need to do a quick Google search for ‘paypal account frozen‘.
This is very unlikely to happen with a bank account. There would need to be a court order or similar. The bank itself can’t just freeze your funds or close your account because someone complained about your business or some other petty thing.
Deposit Protection also relates to the security of your funds. To quote the official Estonian state portal,
Deposits held in credit institutions registered in Estonia are guaranteed and compensated in full, but compensation shall not be larger than 100,000 euros per one person in one bank.
LHV Pank, alongside with Swedbank and SEB pank is one of the banks where deposits are compensated.
This is not the case when having your funds in say your PayPal or TransferWise account. While it’s unlikely that either of those companies will go insolvent, in case they do, you could be left behind.
With TransferWise (and similar services), there’s something else to keep in mind: You DO NOT own your account. You don’t have an actual bank account with them.
The TransferWise borderless account is an Electronic Money account.
- Your bank details are unique, they don’t represent real bank accounts.
- Your money is protected and safeguarded, but not guaranteed by the Financial Services Compensation Scheme (FSCS) that you may get with a bank account.
Accounting Integration – When running an online business, the goal should always be to automate as much as possible. I personally am very happy with LeapIN, their dashboard is easy to use and all my accounts (LHV Pank & PayPal) are integrated into their platform. My accountant sees all transactions; I don’t need to submit a single document.
Compare that to receiving all your payments to your TransferWise or Revolut or Holvi account. For each payment received, you will have to manually submit documentation (plus balance sheets) every month.
Investing – When you’re just starting out, investing is probably not your priority because in all likelihood, you won’t have enough funds to start investing in the first place.
However, if your online business proves to be successful, you will end up with rather significant funds – sooner or later.
If you don’t plan on spending the money, you don’t just want to have it sit in your account – you want to invest some/all of those funds. You can’t do any of that if you have all your funds in your PayPal, TransferWise or similar account.
A real bank account, such as the one you can open with LHV Pank allows you to access a wide range of financial instruments, invest in stocks, index funds, etc.
Lastly, how do you plan on accessing/withdrawing funds?
PayPal, TransferWise and Revolut – all these service provider either already offer debit/credit cards or plan on offering them in the future. Such a card allows for ‘offline’ payment as well as ATM withdrawals worldwide.
In that regard, there’s no benefit to having a debit card from a ‘real’ bank account. In fact, some of these services (Revolut) offer better exchange rates, no withdrawal fees … so for traveling definitely an option to consider.
The final 3 criteria I decided to mention last because in my opinion, they are not of much importance for most people. The first criteria is residency. Holvi doesn’t accept US residents.
If you are a U.S. resident or under FATCA reporting requirements, you can’t use Holvi as banking service. It’s not something you have to spend time thinking about – it’s simply not an option.
Monthly account and bank transfer fees is also something to keep in mind. If you decide against opening an LHV bank account due to the costs, you want to make sure the alternative you choose isn’t costing you more in the long run.
Bank Account Alternatives?
These are all easy to set up online. In most instances all you need to do is submit a copy of your passport as well as the documents you receive after company formation.
- PayPal (Business Account)
Revolut for e-Residency Business?
Revolut is another digital banking service that is often mentioned in the context of e-Residency businesses.
Indeed, Revolut is very similar to a real bank account. You can send/receive wire transfers, use your card to withdraw from ATMs around the globe.
You can also use it to receive payments from Amazon and payouts from Stripe.
For receiving/storing small amounts, it it definitely an option to be considered.
However, given that it’s not a real bank account, I personally would stay clear off storing bigger funds. Holds put on accounts, poor customer service … I would feel uncomfortable storing thousands of $$$ in such an account.
Whichever type of money account you choose, there’s no reason to delay starting your online business. As soon as you have set up your company, you are able to receive money, such as via PayPal & Stripe.
If you are doing Amazon FBA (Kindle, CreateSpace, Audible), you can also ask for payments to be put on hold. Then – once you have set up your bank account (or alternative) – you can tell them remove the payment hold.