However, there are several reasons why you must separate your business finances from your personal finances. For one, having a business bank account will separate itself from your personal assets, while streamlining your tax records. But that is not all. Below are three reasons why opening a business bank account is crucial for your business and your financial sanity.
-A business bank account keeps the ‘corporate veil’ intact to protect your personal assets. Many small business owners form a Limited Liability Company or corporation because it helps shield their personal assets from things that might happen in the business—for instance, if the business is sued or can’t pay its debts. This is known as a corporate veil since it forms some separation between the business owner and the business.
In order to keep that personal liability protection, you need to properly maintain your LLC or corporation. This includes drawing a clear line between your business finances and your personal finances.
By creating a business bank account, you ensure that your business is its own entity and separate from you as an individual.
In addition, if your business is ever sued, the plaintiff may try to pierce your corporate veil by showing you have not maintained the corporation or the LLC to the letter of the law. In this case, they can go after your personal assets. In instances like this, that is why it is absolutely critical for the LLCs and corporations to keep business finances completely separated from personal finances.
-A business bank account helps you stay organised during tax period: Combining your personal account and business account is asking for more trouble that you would think. Ultimately, combined accounts make it harder to stay on top of your books during the tax time.
You may find yourself spending countless hours wading through the past year’s transactions—including personal trips—just to find business expenses to write off.
Having separate accounts streamlines your recordkeeping, which at the end of the day saves you time and ensures you won’t miss any legitimate deductions.
-A business bank account gives more credibility to your paying clients: When you are running a business, it can look a tad unprofessional to pay your contractors with a personal cheque or have your clients write a cheque to you as an individual. Will this ever be a deal breaker? Probably not. But, having a dedicated business banking account can send the right signals as you scale your operations and evolve from freelancer to business owner.
As a side note, if you are running your business as a sole proprietorship, you don’t legally need a separate bank account for your business, but it is still a good idea for the second and third reasons. Having a business bank account can help make your case that you are indeed running a business and are entitled to deduct your business expenses should you ever be audited.
What you need to open your first business bank account:
Opening a business bank account is a relatively simple process. To make things easier, you can open an account at the same bank where you already have a personal account, so you only have to deal with one institution. Alternatively, you may receive reduced banking rates if you belong to a professional group or organisation— such as a group for writers, veterans or performers.
No matter where you choose to open your business account, you will need the following documentation: Your company’s tax ID number.
Articles of organisation/Articles of incorporation: If your business is structured as an LLC or corporation, then you will most likely need your articles of organisation/articles of incorporation that is signed and stamped. You may also need to show your operating agreement.
Certificate of good standing: In some cases, you may also need to get a certificate of good standing. As your business grows, it is crucial to build a proper legal and financial foundation. Opening a separate bank account is one small step in that direction, and will help keep your books organised, as well as ensure your business and personal lives remain separated.