Should I have a business bank account?
Let’s cut to the chase. Yes, you should have a business account. Generally, every business should have its own account that is separate from any personal accounts and this is especially true if an individual is involved in more than one business.
There are, however, examples where you are not legally required to have a separate account for your business. It’s worth understanding the different types of business structure in order to make the right choices for you.
Common business structures
The two most common business structures are sole proprietorship and corporation. When you are establishing a business, it’s important to consider fully which business structure to go with because it will determine which income tax return form you will be required to file.
A business operating under a sole proprietorship indicates that the business is unincorporated and is usually run by one individual. As a sole proprietor, you can (if you wish to) operate your business through your personal account, as there is no legal distinction between yourself and the business. For tax purposes, in a sole proprietorship, the individual and business are one and the same.
In a corporation, it is typical that shareholders will exchange money for shares in the company. Regarding tax-paying purposes, a corporation is recognized as a separate taxpaying entity. This means that it is distinguishable from the individual. In this situation, the business needs to have a separate account from the shareholders. Issues and challenges can arise if shareholders are using one account for their personal and business affairs.
It’s worth noting that even if you are using another separate personal account to act as a business account, it can look like you’ve withdrawn all the cash out of the business personally, which has its own consequences.
Benefits of separate accounts
Why do we recommend having a separate business account? Well, it’s simply because there are numerous benefits to be had.
It saves time
Nobody wants to trawl through their accounts to work out which is business and which is personal. If you miss something in the muddle, you risk missing out on deductions. Having a separate business account that is solely for business transactions will save you significant time when it comes to bookkeeping and time is money.
Your client’s perception of your business could be a deal maker or breaker. Having your business account separate from your personal account will build credibility and trust. When clients are paying you for your product or service, you want them to clearly see the name of your business rather than your personal name. This avoids causing any suspicion when transferring money between parties.
In the situation where you may be audited by the CRA, having a separate business account will allow auditors to have a clear distinction for transactions, expenses and enable them to determine what is deductible.
Should you have separate credit cards for your business too?
Credit cards are a bit different, but it is recommended that each corporation have its own credit card under its own name.
The main difference between credit cards and bank accounts is that typically credit cards represent debt, whereas accounts represent assets.
The bottom line
As a general rule, it is best to keep accounts separate. It’s important to do your research to determine which business structure and in turn, which account, is the correct one for you.