January 13, 2021
One of the most frequently asked questions from founders and entrepreneurs we get is: should I open a business banking account?
Our answer is always – “yes, do it, because it’s worthwhile”. In this post we’ll go through our top three reasons why we advise our clients to open a business banking account.
1. Separation of “Church” and “State”
Your business and personal expenses are incurred for completely different reasons. Typically, business expenses are incurred to generate income while personal expenses are incurred to maintain your lifestyle.
Let’s look at a hypothetical scenario, Tim uses his personal chequing account to pay for both business and personal expenses for the month of March. Tim’s total expenses in his chequing account for the month of March are $5,400. How much of his chequing account expenses can be attributed to his business? Without going through his March chequing account statement line-by-line, it would be impossible for Tim to know how much of the $5,400 of expenses were incurred for business. It would be much simpler if Tim had a separate business and personal banking account which allows for easier record keeping, administration, and significant time savings.
2. Audit Trail
If your business is audited by the CRA for tax reasons, they will require a record of your business expenses. If your personal and business expenses are not separated, you will have to provide the CRA with bank statements for your personal banking account. Naturally, as the CRA sifts through your personal banking transactions, it will lead more questions and time spent to filter out business expenses from your personal banking account.
3. Record keeping and Bookkeeping
If you choose to do your own bookkeeping or hire a bookkeeper, most cloud-based accounting software requires you to link the software to a bank account. Linking your bookkeeping software to your personal account wouldn’t make reconciliations practical. You would need to spend considerable time reconciling business and personal expenses before categorizing your business expenses into the correct profit and loss and balance sheet accounts. Moreover, it would be hard to for you to hire a bookkeeper to do the categorizing as he/she would not be familiar with which individual transactions were incurred for your business or personal expenses. A separate business account would allow you to keep separate records of your business expenses and therefore allow for easy reconciliations for record keeping and bookkeeping purposes.
Other reasons to open a business banking account include: (i) showing your customers and suppliers that you’re a serious business professional vs. someone who is running a lifestyle or hobby business as a side gig, and (ii) establishing a business track record to obtain a credit card or line of credit in the future.
We’re not saying that you ABSOLUTELY HAVE TO open a business banking account however, there are important considerations that favour opening a business account. In addition, if you hope to grow your busines to a certain size and scale, you will eventually be forced to open a business account to obtain credit and manage vendor payment. Why not get a head start and open a business account from the beginning?
Which business account should I get?
Most Canadian banks offer several different type of business accounts which primarily fall into three main categories: (1) A starter “digital” account: this account is the cheapest but comes with the fewest options. It’s usually best suited for someone that does not need to do branch cheque or cash deposits; (2) A flexible package: this account is the “middle of the road” option and allows for in branch cheque or cash deposits up to a predetermined limit; and (3) An all-inclusive package: this account has the most expensive fee but has little to no limitations on transactions.
If you’re just getting started with your business or if you’re still early days, I would recommend opting for a starter “digital” account and then upgrading to the flexible and all-inclusive options as you grow and scale your business.
Do you have any questions? Let us help you, email us anytime at: firstname.lastname@example.org
The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.