To answer the question you’re probably asking about your finances, yes, you can use your personal bank account for business purposes. Your customers can deposit their payments there. You’re not breaking any law by allowing such. However, it’s critical to separate your personal and business savings. This would reduce complications when it’s time to file taxes and compute earnings.
Also, there are key differences between personal and business banking. Knowing them will help you clear the line between personal financial management and business financial management. Even if you only run a small, home-based business, you would still benefit from a business bank account. Remember, a business is considered by the law a separate judicial entity. As such, it needs its own bank account.
Though you won’t get in trouble using your personal bank account, you can be more organized with your business finances separately. So without further ado, here are the key differences between managing your personal finances and business finances:
1. A checking account fits a business more than a savings account.
To organize your personal savings, opening a savings account is advised. There, you can secure your money and spend it without withdrawing, thanks to debit cards or bank transfers. But when you need to pay for a business expense, a debit card or a bank transfer won’t cut it. They’re not illegal, but suppliers usually prefer check payments.
As such, you should open a personal checking account or a corporate checking account. If your business is a sole proprietorship, the personal one will do. Limited liability partnerships and corporations should use a corporate checking account.
A checking account is a deposit account that isn’t subject to the limits a savings account has. It allows you to make numerous withdrawals and deposits without facing the risk of a penalty. Of course, you still need to maintain its minimum balance, but otherwise, there’s no daily spending limit.
Issuing check payments lets you be more organized. It also secures the payment better. For instance, if you issued a crossed check, it means the check cannot be encashed. As such, even if you or the payee lost the check, no one could benefit from its cash equivalent. In addition, no bank would deposit a check – crossed or not – to an account other than the payees. For this reason, suppliers and businesses prefer it.
2. Business expenses result in tax benefits.
A personal income tax, a.k.a. individual income tax, is taken directly from your earnings. Depending on where you live, the government can deduct some expenses from your tax to reduce your taxable income. They also give out tax credits, another way to deduct one’s taxable income.
But these perks are no match to those of businesses that pay their income tax. Business expenses, like new equipment, are deductible. This results in greater tax savings because a company often incurs major expenditures in a single year. The computer you use for business, for example, can be considered a business expense, even if you use it for personal tasks from time to time. Cars and other costly assets used in business will also be deductible. Still unsure what is considered an expense? Reach out to a professional such as Finlyte to gain clarity about your business’s finances.
3. Using a business account for personal expenses can have legal consequences.
We’ve already established that using your personal savings account for a sole proprietorship won’t get you in trouble. Unfortunately, the opposite can happen if you used your business account for personal expenses. If you paid a personal bill using the business’s money, for example, you might also become liable for the business’s debts.
You may face this risk if you run a limited liability corporation or a corporation. If your situation escalates to a lawsuit, the court can “pierce the corporate veil,” meaning it would hold the business owners personally liable for the business’s debts. So if you and your friends own the company, the court would expect you to pay for its debts using money from your own pocket.
Closing down the company won’t make you escape this responsibility. A debt collector can knock on your doors with charges filed against you.
4. The requirements for opening bank accounts.
Lastly, when you open a business bank account, the bank won’t ask for the same requirements you gave for your personal account. Instead, they’d ask for proof that you own the business. This could be a business permit, license, or articles of incorporation. A “Doing Business As” documentation may also be required if you have it.
In addition, the opening balance for a business bank account is higher than that for a personal savings account. Many personal accounts can be opened for as little as $1, whereas business accounts require around $500 or more.
5. Getting Business Finance for Your Company
Talking to a bank for loans is often necessary when starting in business. The exception maybe if you have an investor backing you, but even then, it can’t hurt to ask your bank for loans and financial advice. When thinking about getting business finance, though, don’t forget that other options are available to you. Even if you’re unsure what kind of finance or lending works best for your company, understanding all the different types of financing and where they fit into today’s market will help open up your options, especially when you consider the minimum credit score to get credit. Remember: There’s no such thing as “one size fits all”, so make sure you look at each option carefully before deciding on the correct type of finance for your company.
Knowing these key differences will help you be more responsible in handling your personal and business finances. And most importantly, it’ll reduce your legal risks.