Why You Should Have Separate Bank Accounts for Your Different Legal Entities

Omar Visram
Why You Should Have Separate Bank Accounts for Your Different Legal Entities

When you open a business bank account, you can pay company bills, purchase assets and inventory, and save for emergency expenses through one convenient financial hub.

But just like you shouldn’t use a single account to manage both your business and personal finances, it’s essential to have separate bank accounts for your different legal entities—even when they’re part of the same business venture.

This article explains why.

5 Reasons to set up separate bank accounts for different legal entities

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 you want to open another in a different location. After seeking legal advice, you might decide to register your second café as a separate legal entity with its own 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 why 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, 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 is by no means the complete picture when it comes to 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 makes for a messy reconciliation process that can increase your chances of making mistakes and filing the wrong tax amounts.

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. 

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. Funding-ready financials

Having separate bank accounts for your different legal entities allows you to give lenders and investors detailed visibility into the financial standing of your business 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 it comes to limiting liability and properly reconciling your income. Fortunately, setting up more than one account is easy, and many banks allow you to open a separate business account free of charge.

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