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Ask an Accountant: Do I Need a Business Bank Account?

Short answer: Yes. Read on to find out why your personal and business finances shouldn’t mix.

Building a business from scratch brings a boatload of stress, but there are also plenty of proud moments. Looking at a fresh check made out to your business’s name is one of them.

In order to receive checks that say, ‘Brent’s Plumbing’ instead of ‘Brent Lawson,’ you need a business bank account. But just because a business bank account makes you feel more official, is it necessary?

We spoke with Quan Ly, a Chartered Professional Accountant (Canada) at McRally, who also holds a Certified Public Accountant designation and Masters in Taxation in the US, to get the rundown on business bank accounts.

What’s the difference between a business bank account and a personal bank account?

A personal account is registered under your name, so you can only accept checks made out to you. On the other hand, a business bank account can accept checks made out to your company name as well.

There is also much more paperwork associated with opening a business bank account. Owners have to bring documentation like business registration forms to the bank in order to prove the company’s existence. Additionally, a business bank account comes with more perks like the ability to set up a merchant account, which allows you to accept credit card payments.

Using a business banking account also makes your business look legitimate. Optics matter and first impressions are especially important when you’re trying to find and keep new customers. Running a landscaping business and making payments from your personal account can diminish your company’s perceived professionalism.

The tax implications of using your personal account for business

Let’s say you choose to use your personal checking account for business transactions. Not only are you receiving income to this account, you’re making business expenses as well. Everything from purchasing materials to putting gas in your car for a business trip to taking potential clients out for lunch is a business expense that you will want to claim as deductions come tax time.

This can get very messy very quickly.

At tax time you have to separate your business expenses from your personal expenses in order to make legitimate deductions. It may sound as simple as going through your bank statements with a highlighter, but chances are that it will be more complicated than anticipated.

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At tax time you have to separate your business expenses from your personal expenses in order to make legitimate deductions. It may sound as simple as going through your bank statements with a highlighter, but chances are that it will be more complicated than anticipated.

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For instance, which restaurant expenses were to entertain a client and which were simply to grab a bite? Even if you remember exactly which lunch bills were for yourself and which were for clients, how will you prove it if you’re ever audited? Unless you kept a detailed journal, it’ll be very hard to make your case.

And even if you do present a journal, the IRS or the CRA may not accept your claims. Having your expenses come from a business bank account (especially when they are expenses that can easily be considered personal like food or gas) strengthens your case for calling them ‘business expenses.’

At what stage should you get a business bank account?

For many, it seems like overkill to get a business bank account, especially if they’re still in the early stages of their business. Sole proprietors who run their business under their own name and don’t have a lot of deductible expenses can likely get away with using their personal account, but Ly stresses the importance of separate accounts.

“If you’re a sole proprietor, it’s best practice to have a separate business bank account. I can’t stress the importance of having a clean set of records. Life will be much simpler at year-end and in the event of an audit by the tax authorities.”

And for corporations? There’s simply no question.

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“If you’re a sole proprietor, it’s best practice to have a separate business bank account. I can’t stress the importance of having a clean set of records. Life will be much simpler at year-end and in the event of an audit by the tax authorities.”

Quan Ly, CPA, McRally Quote

If you’re incorporated, you definitely need a separate bank account under your business’s name,” says Ly. “Personal expenses do not belong to your business and should not be co-mingled. Doing so can create significant issues and will ultimately cost you more in bookkeeping and accounting fees. If your personal expenses are not properly adjusted for, you can expose yourself from a tax perspective.”

Should I also get a business credit card?

A business credit card comes with the same perks as a business bank account in the sense that you can add your business name and give it to trusted employees to use. Business credit cards also have higher limits.

Keep in mind that depending on your jurisdiction certain consumer protections (e.g., the laws and policies that come into play when you have a charge complaint) for personal cards may not apply to business cards. While many credit card companies offer these protections as a courtesy, they are not necessarily guaranteed.

On the surface level, a business bank account adds a shiny layer of professionalism and prestige to your company. But at a deeper level, it adds organization and legitimacy to your endeavor and can make your life tremendously easier at tax time. While they may be a pain to set up at first, they are definitely worth the time and effort.

If business is going well it might be time to look into incorporating. We cover the pros and cons of incorporating and when to make the leap.

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