The Importance of Separating Personal and Business Accounts
Do you use a personal bank account to handle your business finances? If so, make plans to switch out of that setup, and fast.
Setting up a business account is crucial if you want your business to operate smoothly. Fortunately, it’s a simple process, and most major banking providers offer that option to business owners who have the relevant requirements and documentation.
You may be tempted to opt for the convenient option of combining personal and business transactions in one bank account. But this can have dire consequences for both your personal and business life, especially if you have big aspirations for your business.
Without further ado, let’s explore the importance of separating personal and business bank accounts.
7 Reasons Why You Should Separate Personal and Business Bank Accounts
Business banking isn’t always a superior option over personal banking. For instance, individuals who aren’t setting up a full-fledged business can stick to their personal bank account.
However, business owners should always strive to open a business bank account for their business, especially if they’re serious about expanding their operations and scaling beyond a single branch.
Willingly sticking with a personal bank account over a business bank account when operating a registered business can lead to a lot of hurdles down the road. It also severely limits your access to opportunities that could improve your business outcomes.
Here are seven reasons why you should separate these two bank accounts.
1. Makes You More Financially Responsible
One major reason why you should separate a personal and business bank account is to remove the need to restrain yourself from getting money meant for business expenditures, and vice versa.
When you own distinct bank accounts, it’s easier to allocate financial resources to the right channels without compromising the other. This also prevents you from misusing funds and miscalculating taxes down the line.
More importantly, it also makes it easier for you to become more financially responsible with your money. To illustrate the point, you won’t feel as tempted to withdraw an extra ten dollars from your business bank account for a personal luxury as you would on your personal account.
This enhanced discipline makes it easier for you to not only maintain focus on the right things at the right time, but it also helps you maintain financial integrity as you run your business. In the long run, this reinforces the best business practices and a more sound approach when dealing with business funds and expenses.
2. Legally Protects Your Personal Assets
A business account limits your personal liability in the event that someone successfully attempts to file a lawsuit against your business and you’re unable to pay the business-related liabilities.
This is because, through their bank account, the business owner has an established and clear separation of their personal and business assets. This helps keep your personal belongings safe from lenders, particularly when you’re unable to fully settle the debt with your business assets.
Having a distinct business banking account is a requirement for LLCs, corporations, and partnerships—meaning they get to enjoy business banking accounts from the get-go. Sole proprietor business owners would need to go out of their way to apply for a business bank account.
Learn more about the differences between personal and business bank accounts here.
3. Simplifies Bookkeeping, Accounting, and Auditing
One of the worst nightmares of any accountant is having to distinguish between personal and business expenses.
This can be bad for the business owner too, as it increases the odds for them to incur penalties for wrongly declared taxes, make bad business decisions based on wrong data, and so on.
With a dedicated business bank account, you can easily track and categorize expenses, making it easier for your financial staff to prepare accurate financial statements.
Furthermore, some business bank account types can also integrate with accounting software, streamlining the accounting process and making it easier for your business to obtain accurate financial reports quickly.
Additionally, having distinct accounts facilitates smoother audits by providing organized financial records in one account. This allows auditors to quickly verify business transactions, minimizing the time it takes to prepare an accurate assessment.
4. Props Up a Professional Front
When it comes to running a business, your brand image and reputation matter much more than you realize. After all, it’s much better optics to be a “CEO and founder” of a business as opposed to a single professional, no matter how reputable you may be in your community.
If your business is using a personal bank account to pay and accept payments, it can look a bit off to your clients and suppliers. It signals to them that you’re nothing more than a small business, which can lead to more apprehension to push for bigger collaborations.
Conversely, if you accept money with a business bank account, it signals to your suppliers and clients that you’re serious about operating your business within your field. This can help you retain customers and even allow you to negotiate better terms with suppliers and lenders.
5. Grants You Access to Business Account-Only Perks
Standing out in the business world is important if you want to catch eyes and, ultimately, conversions. And, believe it or not, owning a business account grants you access to some exclusive perks that can impress and be convenient for your customers.
The most beneficial perk of owning a business account is its ability to accept debit and credit card payments. This increase in payment mode versatility improves your company’s growth opportunities since it makes it more reliable for customers to tap into their funds to purchase your product or service.
Besides that, your business operations can also improve significantly with a business account. For instance, you can gain access to higher transaction limits, better interest rates on savings, and business-specific financial advice.
Additionally, many banks offer tools like payroll services, cash management solutions, and accounting software integration, which streamline your financial processes and enhance operational efficiency.
6. Ensures Accurate Tax Reporting
Doing taxes is hard enough, but if your transaction history is jumbled up with personal expenses, it can be downright impossible to accurately file your taxes correctly. This is especially true if someone else is doing the job for you.
If you want to ensure that your taxes are 100% sound, then it’s essential to have a separate business bank account. Not only does this grant you peace of mind in identifying potential tax deductibles, but it also minimizes the chance of incurring penalties for wrongly filing your taxes.
Furthermore, a separate business account also makes it infinitely easier for you to set up comprehensive tracking features to easily compile relevant information for tax season. This streamlines the tax filing process, allowing you (or your financial staff) to move on to more productive tasks while still maintaining proper legal compliance and financial clarity.
7. Increases Access to Business Credit
Another perk of having a business bank account is that it grants you access to exclusive credit opportunities.
Many banking providers offer business lines of credit opportunities, checking accounts, and special business credit cards to eligible businesses that have opened a business bank account with them.
Furthermore, these business credits tend to have more favorable rates as opposed to the rates you get with owning only a personal bank account. This doesn’t only apply to financial institutions, but other potential lenders as well, like credit unions.
If you’re planning to scale your business and need to tap into a large source of capital, opening a business bank account can be a good way to acquire a sizable lump sum to increase your operational capacity.
