Anyone who has ever run a business has experienced the long and unending logistical errands to be completed to set up the business properly. In these hectic moments, many try to rush through the beginning stages. This is especially true when it comes to setting up and deciding how to manage your business finances. One of the common questions is : could I use a personal checking account for my small business or do I have to open a business account ?
When Is It Mandatory to Have A Business Account?
Whether you are legally obliged to have a business bank account or not, will greatly be determined by your business structure. However, having a business bank account is a beneficial idea for most businesses, be it a partnership, limited company, sole proprietorship, or even freelancers. First things first, if you have been considering to open a business account, get to know some terms and conditions.
Due to some personal reasons, you may have started with your personal checking account for your small business. However, it reaches a time when having a business account can be mandatory. This is when:
- You want to incorporate the small business as a limited company
- You are seriously concerned about accurately filing your tax returns
- The business is processing very many transactions, and the incomes and expenses are getting messy and complicated.
- You want to take card payments from all your customers.
- You want to get a business credit card or take a business loan.
Rules and Law by Business Structures
The rules and laws of business structures depend on the type of business in operation. That is:
- Sole Traders – Ownership is exclusive to one person who will be entitled to keep all the profits but will be liable to any occurring losses in the organization. The trader has full liability to incurring debts and is required to pay tax. Therefore, a personal checking account wouldn’t be of any harm
- Partnership – In this case, the business is entitled between two or more individuals who share profits according to their capital ratios or agreed terms. To maintain a strong relationship among the partners, a business account is necessary
- Limited Companies – This refers to a private company that has owners who are legally responsible for the debts of the company. The annual financial reports and accounts are to be placed in a single domain, and therefore, a separate business account is necessary.
- Limited Liability Partnership – Here, some or at times, all the partners have limited liabilities, and therefore, the company displays elements of corporations and partnerships. Profit is taxed as income and partners are required to disclose their income. Therefore, a business account is mandatory.
Can I Use My Personal Account for Business?
Whether or not you can use your personal account for the business will be determined by the type of business structure you have chosen to trade under. If you are a sole trader, both your personal and business affairs are treated as one for the purposes of taxation. Therefore, you can use your personal account for the business’s transaction. On the other hand, if your business is a limited company, it is considered as a separate legal entity from its directors and shareholders. Therefore, it is mandatory to have a separate business account from the personal checking account.
Advantages of Business Accounts
The following are the advantages of having a business account:
- Confidence is instilled to your customers – It sounds professional to ask customers to pay into an account with the business name. This is because very many customers do not prefer paying directly into non-business accounts.
- Tax relief claims are made easier – With this type of account, the HM Revenue and Customs considers your venture a profit-making entity and therefore legitimate. Expenses can thus be claimed back since you will be able to prove that you have well-maintained business books.
- You will have clean and accurate bookkeeping – A separate business account means that you will have clean records to give your accountant and auditor at the end of the year. There will be no mess of mixing your personal and business finances. With this, you can keep your bank statement entries and checkbook and therefore be in good shape when the time for income tax has reached.
- A Clear Audit Trail for HMRC -If your books have to be audited by HMRC, you have the advantage of getting very clean and clear audits. However, HMRC will only do the auditing if you have clean record-keeping and a separate business bank account. Your invoices and expense receipts should be well kept as they will need to serve as backup materials. Mixing your business and personal finances makes it hard to audit your business.
Be careful to maintain the professionalism of your business by keeping your business finances separate from your personal finances. Cheques written to suppliers will show that you truly have a real on-going business concern.