Can I Use My Personal Bank Account for My Small Business?
Although sole traders may use their personal bank account for their business, they are encouraged to open a separate one. If you do use a single account, you must
Although sole traders may use their personal bank account for their business, they are encouraged to open a separate one. If you do use a single account, you must ensure you record any personal finances and expenses in a cash book. These expenses can include any money you have taken account from what the business receives. Separating personal and business expenses is essential for tax purposes because you can only claim amounts related to your business. Therefore, having a separate account for each can save time whilst doing tax returns and preparing financial activity statements.
Why should I make a separate account?
Most banks insist on a separate business account which may incur a monthly fee. However, these accounts will allow for cleaner accounting in which you can easily identify your transactions. Moreover, it makes your account appear more professional because you can ‘trade as’ your company, rather than your personal name. Mainly, it will follow the accounting entity concept in which your personal expenses must be different to your business expenses.
Benefits of a bank account:
A separate business bank account will be beneficial in the following ways:
- Clearly distinguish between your business and personal finances
- Analyse your cash flow
- Monitor your business income and expenses
- Easily generate reports of your business transactions
- Cleaner and more professional accounting
- Extract relevant information for tax purposes
What to consider when choosing a business account?
Before implementing a business account, you should consider the type of business you run. If you are unsure of the type, look up your registered ABN. You should also determine the cash flow and services your company would need. Moreover, you must consider the merchant facilities available such as Eftpos. It is also important to analyse whether your sales are international or domestic and the type of interest you would charge.
Another helpful way to manage your business accounts is through internet banking. Banks have very strict security and encryptions to protect your accounts. Internet banking is very convenient as it allows you to make payments at any time. You can also set up direct debits and automatic payments for regular payments. Banks usually provide certain packages to help set up a business bank account.
Other business types
Keep in mind, if you want to become a partnership, company or trust, you must have a separate business account. Unlike sole traders, limited companies are separate business entities from their shareholders and directors. Therefore, the personal expenses of directors are different to the expenses of the company. Whereas, a sole trader is liable for themselves and can adopt a personal business account if their bank permits it.
Although it is possible to use your personal bank account for your small business, it is better to separate the two. Doing so will allow you to clearly distinguish between your business and personal expenses. This will make accounting for your transactions easier, especially during tax return periods.
Aditi currently works in the Content Team as a Legal Intern for Lawpath. She is in her third year of a Bachelor of Law and Bachelor of Commerce (Accounting) at Macquarie University. She is particularly interested in Property and Criminal Law.