As a small business owner, you probably encounter a lot of overlap between your business and personal finances. At first glance, it may seem simpler to just have one bank account – it’s a centralized place to keep tabs on client payments that come in, and personal and business expenses that go out. For example, you know that Judy down the street just purchased two new puppy costumes at $100 apiece from your pet store, but you also know that you went over on your phone bill… again (hey, it happens).
However, it’s really important that you separate your business and personal finances. Here are several reasons why, plus some tips for opening a small business account.
Why do I need an account for my business?
Liability reasons. In order to protect any personal assets from things that might happen in business (for example, getting sued or going into debt), you need to draw a line between your business finances and your personal finances.
Tax reasons. Combining your accounts makes it harder to stay on top of your books come tax time. Do you really want to spend hours wading through the past year’s transactions to find business expenses to write off? Probably not.
Credibility reasons. When paying your employees or contractors, it can look unprofessional if you’re handing over personal cheques. It’s not a deal-breaker, but it can help send the right signals as you scale your operations and evolve from freelancer to business owner.
Business Chequing Account 101
Just like your personal chequing account, this account is where you keep funds for day-to-day operations and managing money flowing in and out of your account. Cash flow, receivables and payables are important to businesses, and a chequing account makes controlling these activities efficient and transparent. It also helps keep important records for accounting, taxation and legal purposes. Business account holders can access, view, and print an archive of past transactions (eStatements) through online banking for free.
How to pick a business chequing account.
Take a look at your past chequing transactions. If you have mostly deposits in a one month period, look at an account package that offers unlimited deposits for a low fee. Alternatively, if you lean heavily towards withdrawals, look for an account package that includes a high number of withdrawals. If you have lots of both, pick a low-cost account that has no caps on either type of transaction.
Pay close attention to fees. These can add up if you have the wrong account. Don’t pay for a Rolls Royce account if a Honda will do just fine – after all, you’re a business and every dollar counts.
Business Savings Account 101
You’ll want a separate savings account for your business as well. A key function of a savings account is to set funds aside for contingencies (in other words, unexpected business expenses). Use your savings account to keep any taxes collected, like GST and PST. You don’t want these funds mingling with the business income in your chequing account. Plus, any interest earned is yours (bonus).
Small businesses should also use their savings accounts for planned future expenses. Building some savings to pay for at least part of your business expense needs will reduce the amount of credit you need for capital expenses.
How to know if you have the right business savings account.
Look at the features. A savings account is primarily for deposits, so look for a package that includes unlimited free deposits. If you’ll be using it for transactions other than deposits, guesstimate how many and how much you’ll be charged, then pick the account that gives you the best value. Also, consider the fees associated with an account: some have monthly fees and a minimum monthly balance, while others don’t.
If interest is in your interests, compare products for a high-interest business savings account. In general, the higher the amount in your savings account, the higher the interest.
What do I need to open a small business account?
The documents you need depend on the legal structure of your business—whether you’re a sole proprietor, a partnership, or incorporated.
If you’re a sole proprietor and want to use a trade name on the account, you’ll need proof of your business registration. Partnerships need a partnership agreement, while incorporated businesses must provide a Certificate of Incorporation, as well as required ownership documentation.
Most financial institutions will have a detailed checklist on their website. Review this and take all the required documents when opening your account.
If you’re on the fence about which type of account is best for your needs, give our friendly Business Banking Team a shout. We’re always happy to help.