A business bank account allows you to pay company bills, purchase assets and inventory, and save for emergency expenses through one convenient financial hub.
But just as you shouldn’t use a single account to manage both your business and personal finances, it’s essential to have separate bank accounts for different legal entities—even when they’re part of the same business venture.
This article explains why.
Reasons to set up separate bank accounts for different Businesses
No matter the size or type of business, a dedicated bank account makes it easier for business owners to track their day-to-day financial transactions. However, as your small business grows or your business structure evolves, you may need more than one account.
Let’s say you own a café, for example, and want to open another in a different location. After seeking legal advice, you might register your second café as a separate legal entity with its bank account for liability reasons.
That way, if one café struggles with debt but the other performs well, debtors can’t easily lay claim to the assets or cash of your financially successful business entity.
While it’s not legally required, here are a few more reasons we recommend keeping separate bank accounts for distinct business entities.
1. Easier bookkeeping
Having more than one legal entity means managing multiple sources of income and different sets of expenses. By setting up separate bank accounts (and using accounting software to reconcile your monthly statements), you can readily identify which business transactions belong to which organization.
Not only will this make it considerably easier to keep your books accurate and up to date throughout the year, but you’ll also spend less time sifting through receipts and reconciling your business credit cards when tax season arrives.
2. Better cash flow management
Your bank balance does not provide a complete picture for managing cash flow. That’s why separating your bank account transactions is essential for:
- Tracking the money flowing in and out of each business structure
- Independently identifying their profits, losses, and financial status
- Managing and reacting to your overall cash situation
When you commingle (or combine) your business funds, you muddy your cash flow visibility—and that can cause problems when it comes to staying on top of each entity’s debt obligations.
3. More accurate tax returns
Combining your business accounts leads to a messy reconciliation process that can increase the chances of making mistakes and filing inaccurate tax reports.
Having separate business bank accounts doesn’t just save time and help prevent errors during tax season, however. It also streamlines your record-keeping by making identifying taxable benefits and deductions easier.
4. Audit-ready transactions
Using distinct bank accounts won’t guarantee fewer audits—but separating out your transactions will help keep your business finances audit-ready.
Having separate bank accounts helps create a clear, auditable trail of transactions that the CRA (or Revenue Québec) can follow. This separation reduces the risk of errors and omissions in financial reporting, which can lead to penalties or additional taxes. For example, if a business operates both a manufacturing division and a retail division as separate entities, having distinct bank accounts ensures that the financial operations do not overlap, making it easier for auditors to verify compliance with tax laws specific to each business.
Equipping each legal entity with its own bank account makes it easier to organize your income and expenses and demonstrates a clear audit trail that will make any review process less painful.
5. Financial Responsibility and Liability
Separate bank accounts help delineate financial responsibility, particularly when businesses face financial difficulties. If one entity encounters financial issues, having separate accounts can protect the more stable entity from creditors associated with the struggling entity. This separation is crucial in insolvency situations, where the assets of one entity need to be clearly distinguishable from those of another to ascertain creditor claims accurately.
6. Funding-ready financials
Having separate bank accounts for your different legal entities allows you to give lenders and investors detailed visibility into your business's financial standing as a whole.
Should the time come when you need to apply for a bank loan or raise external funding to help finance your business, demonstrating clear and accurate financials will both streamline the process and set you up for greater success.
Using a single bank account for multiple legal entities can be risky when limiting liability and properly reconciling your income. Fortunately, setting up several accounts is easy, and many banks allow you to open a separate business account free of charge.
7. GST/HST Compliance
Canadian businesses must comply with the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) regulations, which require accurate tracking of taxable sales and input tax credits. Separate bank accounts for each entity simplify the management of GST/HST because they allow businesses to more easily calculate the tax owed or refundable for each entity. This separation helps prevent errors in tax filings and ensures that entities that are registered for GST/HST are clearly accountable for their tax obligations independently of other entities within the same business group.
8. Provincial Tax Considerations
Canadian provinces may have unique tax considerations and business incentives that can affect businesses differently depending on their structure and location. For instance, Alberta's corporate income tax rate differs from Quebec's, and Alberta does not have a provincial sales tax. Quebec has different tax rates, and tax compliance in the province is administered by Revenue Québec, not the CRA. Separate bank accounts help ensure that entities operating under different provincial laws maintain compliance with regional regulations and can take full advantage of provincial tax benefits and credits, such as the small business deduction or sector-specific grants available only to businesses in certain regions.
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