Many small business owners start off funding their business from their personal savings. So it’s not uncommon for them to continue using their personal bank account and credit cards for business purposes as they move forward.
Since you’re not legally required to open a separate business account unless you operate as a corporation, sole proprietors don’t always see the point of having separate business and personal bank accounts for several reasons:
- Setting up a business bank account takes time
- Sole proprietors pay personal income tax to account for business net income
- They don’t have separate legal status from their business so they assume any risks associated with it.
In practice, however, maintaining separate accounts is always a good idea. While it requires only a small adjustment, creating a business bank account offers big benefits and can prevent a lot of hassle down the line.
Why You Should Keep Your Business and Personal Bank Accounts Separate
Using your personal credit card or debit card for business expenses makes it challenging to distinguish between business and personal transactions on your bank statement.
Setting up a separate bank account lets you easily track your business transactions so you can:
- Keep your bookkeeping accurate and up to date
- Avoid sifting through months of statements and receipts to separate your business and personal expenses come tax time
- Get caught up on year-end bookkeeping faster
You can even connect your business bank accounts to accounting software like QuickBooks or Xero to record your revenue and expenses in real-time.
Efficient Tax Returns
Maintaining separate business and personal bank accounts won’t just save you time during tax season, it will help you file more accurate tax returns.
Going through every line on your bank statements when business and personal expenses are mixed can take hours, or even days, and increases the chance you’ll include or exclude the wrong items.
Using separate accounts streamlines your record-keeping by making it easy to identify taxable benefits and deductions.
Fun fact: Did you know the bank fees incurred to operate your business or process payments qualify as tax deductible business expenses?
Clear Audit Trail
One of the upsides of being a sole proprietor is that you get to run your own show. One of the downsides is that you’re more likely to get audited.
The main reason small business owners raise more red flags than people who work for someone else is that employee T4 slips clearly show annual earnings, deductions and taxes withheld.
Using a separate bank account won’t guarantee fewer audits. But separating out your business transactions and providing a clear audit trail will make the process less painful.
Accurate Cash Flow Management
While your bank balance is by no means the complete picture when it comes to your cash flow, separating business and personal finances makes it easier to manage and react to your current cash situation.
If you notice, for example, that your balance is running low, you can perform a quick cash injection. If you notice there’s too much money lying dormant in your account, you can put it to better use elsewhere.
It’s also easier to demonstrate your financial position when you maintain separate business and personal bank accounts. The clearer your financial records, the simpler it is to apply for funding from a lender or credit provider.
Business Credibility & Professionalism
Whether you run a consulting firm or coffee shop, maintaining business credibility is essential.
While many small business owners accomplish this by creating branded logos, websites and marketing materials, keeping your business and personal accounts separate is another way to demonstrate professionalism.
Using a business bank account to make and receive payments directly through your business establishes a greater level of trust with suppliers and clients.
Business Credit Score
Using a separate business account helps build your business credit rating. Similar to your personal credit rating, your business credit score is a reflection of your company’s creditworthiness. A strong credit score can help you secure better terms for business loans and reduce the cost of business insurance.
At Enkel, we advise all our clients to keep separate business and personal bank accounts. While our team focuses on streamlining your bookkeeping and delivering accurate financial statements, you can focus on growing your business. Contact us to learn more about how we can help you keep your books organized.