By Shay Steacy, CFP
Do you need a business bank account?
As the sole owner of your business, it’s sometimes hard to see the line that divides personal expenses from expenses you incur to earn income from your business. As a sole-proprietor, you and your business are one in the same, so expenses technically come from the same pot. However, there are some serious advantages as to why you should separate personal costs from business costs.
The first thing I want to clear up is the question of whether or not you need a business bank account. What I’m talking about here is a bank account specifically in the name of your business.
If you want to issue invoices and accept payments in any name other than your personal name, you’ll need to open a business bank account. This includes traditional banking methods like depositing and issuing cheques, but also includes the bevy of online or electronic payment methods.
Business bank accounts are usually more expensive than personal accounts, but if you want bank account name to be that of the business, you’re stuck (just shop around to make sure you’re getting the best one for your needs!)
So what if you can conduct all business in your name alone? Do you need to go through the process of setting up an additional bank account? My recommendation is yes…
The biggest reason is that it makes it so much easier to isolate your expenses that relate to the business, and were incurred for the purpose of making an income. According to a Sensibill survey of American micro-business (1-5 employees), untangling business expenses from personal can take 40-80 hours per year. These business are also 6-8 times more likely to get audited…. Ain’t nobody got time for that!
Business expenses are deductible, meaning they reduce the amount of income that you will pay tax on. So you’ll want to claim as many valid business expenses as possible, and this is much easier to do if you can see all the expenses in one account.
This not only applies to bank accounts, but to credit cards as well. Therefore, one credit card and one bank account will pay business expenses (e.g. office overhead, insurance, inventory, etc.), and one credit card and bank account will pay personal expenses (e.g. groceries, child care, alcohol for those long weeks….)
There is another bank account that I would recommend setting up, and that’s a “taxes” account. From every dollar you earn, you should be putting aside money into a bank account that will be used to pay your income tax. There are different ways to calculate this amount, and it will vary person to person, but a good starting point is at least 20%. (If you are collecting HST on your sales, you should also have a bank account for the HST amount. This isn’t your money- you can’t spend it! Set it aside in a separate account for tax time).
As you can see, there are many practical reasons to separate your business from personal spending. But the Financial Planner in me would also be remiss if I didn’t mention that it will also help you in the longer term see profitability of your business, and understand how your business can help you meet your financial goals.
There are many traditional banks as well as online options available for bank accounts, so hop on over to Google and get searching…. What are you waiting for?
COVID update If your business was/is eligible for government benefits that were offered during COVID (ie. CEBA), there may be a need for a business bank account. The requirements for government benefits are ever-changing, so make sure to read the details of programs you might be eligible for.
Comentarios