Are you still using your personal checking account to manage your business finances? Regardless of whether you own a home-based business or are building a multi-million dollar enterprise, there are several benefits to differentiating between your personal and business finances. In this article, we will discuss the following: The numerous reasons you should have a business bank account and how to open up a business bank account.
The reasons you should have a business account
Having a business account will ensure that you keep your business funds separate from your personal funds.
Here are some of the worthwhile reasons:
1. Having a business bank account gives your new business credibility and professionalism. This is particularly important if you have customers that pay with cheques. It definitely looks more professional when you ask your clients to write a cheque to “XYZ Enterprise” as opposed to “Bob Smith.” It also looks more business-like and credible when you use separate business cheques and a separate business credit card to pay suppliers and other companies for their services.
2. Having a business bank account is advantageous for tax purposes. Maintaining a separate business bank account will help you keep track of all your business-related transactions and will make it easier to pay your taxes when tax season rolls around. It will also provide you with a clear trail of your business revenue and expenses in case the CRA decides to audit you.
3. Although having a separate business bank account is advisable for businesses that are sole proprietorships or partnerships, it is especially recommended for corporations (more about these business structures later in this article). A corporation refers to a business that is a separate and distinct entity from its owners and as such the personal assets of the owners are sheltered from potential liability. However, sometimes courts will hold the corporation’s owners, members, and shareholders personally liable for business debts. When this occurs, it’s called “piercing the corporate veil.” For instance, if the corporation has been utilized as an instrument of fraud and improper conduct, or was incorporated for no valid business purposes, then the court may deem the shareholders personally liable. One of the criteria which may be used to decide whether the court should “pierce the corporate veil” is the degree of separation between the financial activities of the business and those of the owners of the business. As such, it is vital that an incorporated company have a separate business bank account.
4. The most obvious reason to have a business bank account is that you will be able to keep track of your cash flow and to see if your business is profiting. A business checking account ensures that all your business transactions are separate from your personal financial transactions. This helps you monitor your business’s profitability. If you were to combine your personal financial transactions with your business financial transactions into one account, you might have a difficulty determining your profit margin because to determine your profitability, you must remember which expenses were personal and omit them.
How to open up a business bank account
There are three main steps to opening a business bank account: 1. choose a business structure, 2. decide on who will be the primary business representatives and 3. provide the bank with several critical documents.
1. Choose a business structure
Prior to setting up a business account, it is imperative to decide which type of business structure you will be running. Is it a sole proprietorship? partnership? or corporation?
In a nutshell, here are the differences between the three business structures:
- A sole-proprietorship refers to a business in which you are the sole owner and fully responsible for all debts and responsibilities related to your business. One of the advantages of this business structure is that all profits go directly to you. However, one of the disadvantages is that you are subject to unlimited liability which means that a creditor can make claims against your personal assets to pay off your business debts.
- A partnership refers to a business in which you and another individual or multiple individuals have a legal relationship to operate a business as co-owners. In a partnership, you and your business partner(s) combine your financial resources into the business. You and your partner(s) share the management, profits, and assets of the business as outlined by the legal agreement you have formulated. One of the benefits of this business structure is that there is a tax advantage. For instance, if income from the partnership is low or loses money, you and your partner(s) include your shares of the partnership in your individual tax returns. One of the disadvantages is that there is no legal difference between you and your business so similar to owning a sole-proprietorship, you have unlimited liability.
- A corporation refers to a business entity that is separate from its owners. The majority of corporations have shareholders, and the shares are held only by a few individuals, or they may be available for sale to the public (publicly held). One advantage of this business structure is that as a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. One of the disadvantages of owning a corporation is that it is more expensive and time-consuming to set up than other business forms. We advise that you seek legal advice if you plan on incorporating.
If you’d like to read some of the advantages and disadvantages of having a sole-praetorship, partnership, and corporation, check out this article from Canada Business Network.
2. Decide who will be your primary business representatives
Next, after you decide on a business structure, determine who will be the primary representative for your business. In other words, who will have the authority to sign on contracts, cheques as well as perform certain functions such as withdrawals, transfers, and payments on behalf of the company?
3. Provide the bank with several critical documents
Typically, banks require that all owners and signing officers provide two pieces of approved personal identification.
Also, depending on your business’ legal structure, you will be required to provide additional documents to the business bank specialist. For instance, for each of the following business structures, you will need to provide the following documents:
– Certificate of Registration of Business Name
– Certificate of Registration of Partnership. Partnership Agreement (if available)
– Articles of Incorporation. Certificate of Registration of Business Name (if available).
-Most current filing with your incorporating jurisdiction listing your directors
-Trade Name Registration (if applicable)
An important note: Please contact the bank that will be managing your business bank account to determine if you require additional documentation and what their exact procedures are for opening a business account.
If you require additional consultation or want to learn more about our professional accounting services, please do not hesitate to contact S & P Accounting Services.
Polina Presman, CPA, CA
Shani Marzin, CPA, CA
S&P Accounting Services LLP
2727 Steeles Ave. W. Suite 300
North York, ON, M3J 3G9
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